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Aging And Fiscal Sustainability In A Small Euro Area Economy

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  • Castro, Gabriela
  • Maria, José R.
  • Félix, Ricardo Mourinho
  • Braz, Cláudia Rodrigues

Abstract

Population ageing is a key trend in Western economies. The impact of this trend will be widespread, affecting investment and saving decisions over the next decades, and represents a major challenge to policymakers. Debt sustainability issues in euro area economies may (re)emerge, particularly given the pay-as-you-go nature of most public pension systems. In a decentralised fiscal policy framework, ageing and the respective policy response might intensify the latent macroeconomic imbalances that underlie the ongoing sovereign debt crisis. In this paper, we include a stylised pension system in an open economy New-Keynesian general equilibrium model with non-Ricardian agents. The model is used to assess the macroeconomic impacts of ageing in a small euro area economy. The results suggest that the impact can be significant, depending on the magnitude and pace of the ageing dynamics, the existing rules for social benefits and the policy response. It can be inferred from the results that supranational policy coordination at euro area level is crucial to foster economic and financial stability.
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  • Castro, Gabriela & Maria, José R. & Félix, Ricardo Mourinho & Braz, Cláudia Rodrigues, 2017. "Aging And Fiscal Sustainability In A Small Euro Area Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 21(07), pages 1673-1705, October.
  • Handle: RePEc:cup:macdyn:v:21:y:2017:i:07:p:1673-1705_00
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    Cited by:

    1. Daniel Baksa & Zsuzsa Munkacsi, 2016. "Aging, (Pension) Reforms and the Shadow Economy in Southern Europe," Bank of Lithuania Working Paper Series 32, Bank of Lithuania.
    2. Dieppe, Alistair & Mourinho Félix, Ricardo & Marchiori, Luca & Grech, Owen & Albani, Maria & Kulikov, Dmitry & Papadopoulou, Niki & Sideris, Dimitris & Irac, Delphine & Gordo Mora, Esther & Vogel, Edg, 2015. "Public debt, population ageing and medium-term growth," Occasional Paper Series 165, European Central Bank.
    3. Masuch, Klaus & Anderton, Robert & Setzer, Ralph & Benalal, Nicholai, 2018. "Structural policies in the euro area," Occasional Paper Series 210, European Central Bank.
    4. repec:agr:journl:v:2(615):y:2018:i:2(615):p:187-194 is not listed on IDEAS
    5. Daniel Baksa & Zsuzsa Munkacsi, 2016. "A Detailed Description of OGRE, the OLG Model," Bank of Lithuania Working Paper Series 31, Bank of Lithuania.
    6. Kristina Karagyozova-Markova, 2016. "Evaluating the effects of population ageing on long-term growth and pension system sustainability in Bulgaria through an overlapping generations model," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 59-78.
    7. repec:ecb:ecbops:2014165 is not listed on IDEAS
    8. Daniel Baksa & Mihnea Constantinescu & Zsuzsa Munkacsi, 2016. "Aging, Informality and Public Policies in a Small Open Economy," Bank of Lithuania Discussion Paper Series 2, Bank of Lithuania.
    9. Kazutoshi Miyazawa & Hikaru Ogawa & Toshiki Tamai, 2018. "Tax Competition and Fiscal Sustainability," CIRJE F-Series CIRJE-F-1103, CIRJE, Faculty of Economics, University of Tokyo.

    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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