Fiscal sustainability and policy rules under changing demographic forecasts
AbstractAll practical evaluations of fiscal sustainability that include the effects of population ageing must utilize demographic forecasts. It is well known that such forecasts are uncertain, and that has been taken into account in some studies by using stochastic population projections jointly with economic models. We develop this approach further by introducing regular demographic forecast revisions that are embedded in stochastic population projections. This allows us to separate systematically, in each demographic outcome and under different policy rules, the expected and the actualized effects of population ageing on public finances. We show that the likelihood of sustainability risks is significant, and that it would be wise to consider policies that reduce the likelihood of getting highly indebted. Furthermore, although demographic forecasts are uncertain, they seem to contain enough information to be useful in forward-looking policy rules.
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Bibliographic InfoPaper provided by The Research Institute of the Finnish Economy in its series Discussion Papers with number 1265.
Length: 36 pages
Date of creation: 2011
Date of revision:
Find related papers by JEL classification:
- H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
- H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
- J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
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