This paper develops a dynamic, life-cycle, general equilibrium model to study the interdependent demographic, fiscal, and economic transition paths of China, Japan, the U.S., and the EU. Each of these countries/regions is entering a period of rapid and significant aging requiring major fiscal adjustments. In previous studies that excluded China we predicted that tax hikes needed to pay benefits along the developed world's demographic transition would lead to capital shortage, reducing real wages per unit of human capital. Adding China to the model dramatically alters this prediction. Even though China is aging rapidly, its saving behavior, growth rate, and fiscal policies are very different from those of developed countries. If this continues to be the case, the model's long run looks much brighter. China eventually becomes the world's saver and, thereby, the developed world's savoir with respect to its long-run supply of capital and long-run general equilibrium prospects. And, rather than seeing the real wage per unit of human capital fall, the West and Japan see it rise by one fifth by 2030 and by three fifths by 2100. These wage increases are over and above those associated with technical progress.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
11668.
Length: Date of creation: Oct 2005 Date of revision: Handle: RePEc:nbr:nberwo:11668
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Find related papers by JEL classification: E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates H2 - Public Economics - - Taxation, Subsidies, and Revenue H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents H5 - Public Economics - - National Government Expenditures and Related Policies H6 - Public Economics - - National Budget, Deficit, and Debt J1 - Labor and Demographic Economics - - Demographic Economics
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Martin Feldstein & Jeffrey B. Liebman, 2001.
"Social Security,"
NBER Working Papers
8451, National Bureau of Economic Research, Inc.
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Other versions:
Feldstein, Martin & Liebman, Jeffrey B., 2002.
"Social security,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324
Elsevier.
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