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Population Ageing And Intertemporal Consumption: Representative Agent Versus Social Planner

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  • John Creedy
  • Ross Guest

Abstract

This paper examines the optimal path of consumption over time in the context of population ageing. Older age groups are considered to have relatively greater ‘needs’, resulting for example from additional health costs. These differences give rise to the concept of the ‘equivalent number of persons’, as distinct from the population size. Emphasis is given to the difference between a framework involving a representative agent and one in which plans are made by a social planner. The precise conditions under which consumption growth paths are the same under the representative agent and the social planner are established. This equivalence is found to hold only in the case where the social planner’s value judgements are such that individuals are considered to be the appropriate unit of analysis. An alternative assumption, in which equivalent persons are regarded as the appropriate units, is found to give rise to a different optimal consumption path. Numerical examples demonstrate the relative orders of magnitude for a range of parameter values. The differences are found to be potentially important. The choice of appropriate consumption units – individuals or equivalent persons – is far from arbitrary since it involves possibly conflicting value judgements. This choice has implications for policies designed to influence the optimal saving rate, such as superannuation policy and the fiscal balance.

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Bibliographic Info

Paper provided by The University of Melbourne in its series Department of Economics - Working Papers Series with number 972.

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Length: 28 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:mlb:wpaper:972

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Keywords: Ageing; Intertemporal Consumption;

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References

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  1. Dave Turner & Claude Giorno & Alain de Serres & Ann Vourc'h & Pete Richardson, 1998. "The Macroeconomic Implications of Ageing in a Global Context," OECD Economics Department Working Papers 193, OECD Publishing.
  2. Werner R�ger & Jan in 't Veld, 2002. "Some selected simulation experiments with the European Commission's QUEST model," European Economy - Economic Papers 178, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  3. Productivity Commission, 2005. "Economic Implications of an Ageing Australia," Labor and Demography 0506001, EconWPA.
  4. John Creedy & Catherine Sleeman, 2005. "Adult Equivalence Scales, Inequality and Poverty," Department of Economics - Working Papers Series 938, The University of Melbourne.
  5. Cutler, David M & Katz, Lawrence F, 1992. "Rising Inequality? Changes in the Distribution of Income and Consumption in the 1980's," American Economic Review, American Economic Association, vol. 82(2), pages 546-51, May.
  6. Atkinson, Anthony B., 1970. "On the measurement of inequality," Journal of Economic Theory, Elsevier, vol. 2(3), pages 244-263, September.
  7. Banks, James & Johnson, Paul, 1994. "Equivalence Scale Relativities Revisited," Economic Journal, Royal Economic Society, vol. 104(425), pages 883-90, July.
  8. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc.
  9. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  10. Anthony Shorrocks, 2004. "Inequality and welfare evaluation of heterogeneous income distributions," Journal of Economic Inequality, Springer, vol. 2(3), pages 193-218, July.
  11. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  12. Glewwe, Paul, 1991. "Household equivalence scales and the measurement of inequality : Transfers from the poor to the rich could decrease inequality," Journal of Public Economics, Elsevier, vol. 44(2), pages 211-216, March.
  13. Ebert, Udo, 1997. "Social Welfare When Needs Differ: An Axiomatic Approach," Economica, London School of Economics and Political Science, vol. 64(254), pages 233-44, May.
  14. Shorrocks, Anthony, 2004. "Inequality and Welfare Evaluation of Heterogeneous Income Distributions," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  15. André Decoster & Erwin Ooghe, 2002. "Weighting with individuals, equivalent individuals, or not weighting at all. Does it matter empirically?," Public Economics Working Paper Series ces0215, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Working Group Public Economics.
  16. Lewbel, Arthur, 1989. "Exact Aggregation and a Representative Consumer," The Quarterly Journal of Economics, MIT Press, vol. 104(3), pages 621-33, August.
  17. Jenkins, Stephen P & Cowell, Frank A, 1994. "Parametric Equivalence Scales and Scale Relativities," Economic Journal, Royal Economic Society, vol. 104(425), pages 891-900, July.
  18. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
  19. John Creedy, 2006. "Evaluating Policy: Welfare Weights And Value Judgements," Department of Economics - Working Papers Series 971, The University of Melbourne.
  20. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
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Citations

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Cited by:
  1. Creedy, John & Guest, Ross, 2008. "Changes in the taxation of private pensions: Macroeconomic and welfare effects," Journal of Policy Modeling, Elsevier, vol. 30(5), pages 693-712.
  2. John Creedy & Ross Guest, 2008. "Sustainable Preferences and Damage Abatement:Value Judgments and Implications for Consumption Streams," Department of Economics - Working Papers Series 1026, The University of Melbourne.
  3. Lees, Kirdan, 2013. "Golden years? The impacts of New Zealand’s ageing on wages, interest rates, wealth and macroeconomy," NZIER Working Paper 2013/1, New Zealand Institute of Economic Research.
  4. Melnikov, N.B. & O'Neill, B.C. & Dalton, M.G., 2012. "Accounting for household heterogeneity in general equilibrium economic growth models," Energy Economics, Elsevier, vol. 34(5), pages 1475-1483.

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