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Human capital formation and macroeconomic performance in an ageing small open economy

  • Heijdra, Ben J.
  • Romp, Ward E.

We study the effects of stylized demographic and fiscal shocks on the macroeconomic performance of an industrialized small open economy. We construct an overlapping-generations model which incorporates a realistic description of the mortality process. Agents engage in educational activities at the start of life and thus create human capital to be used later on in life for production purposes. Simple and intuitive expressions are derived which demonstrate the key economic and demographic mechanisms that are operating in the model. The engine of growth during the demographic transition is an intergenerational externality in the production of human capital. In a calibrated version of our model, we find that the effects of increased longevity on human capital formation are small whereas the reduction in fertility has a rather strong effect.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 33 (2009)
Issue (Month): 3 (March)
Pages: 725-744

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Handle: RePEc:eee:dyncon:v:33:y:2009:i:3:p:725-744
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  1. Heijdra, Ben J. & Romp, Ward E., 2005. "A Life-Cycle Overlapping-Generations Model of the Small Open Economy," Research Report 05C04, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
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