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PAYG Pensions and Economic Cycles

Listed author(s):
  • Luciano Fanti
  • Luca Gori

In this article we compare the dynamics and long-run outcomes of an overlapping generations closed economy under exogenous and endogenous fertility. Individuals have myopic foresight, and pay-as-you-go (PAYG) public pensions exist. Although large PAYG transfers may cause endogenous fluctuations in both contexts, cyclical instability and deterministic chaos more likely occur when fertility is an economic decision variable. We find that the existence of endogenous fertility and PAYG pensions can explain the occurrence of demographic oscillations that mimic the baby boom and baby bust, in contrast with the unrealistic case of constant population, and also economic cycles. We also show that an increase in the social security contribution rate under endogenous fertility, often advocated as a remedy against the crisis of public pension budgets, may prolong both the phases and size of demographic (economic) cycles around a lower (higher) long-run level of population growth (income per worker) than under exogenous fertility.

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File URL: http://pfr.sagepub.com/content/40/2/240.abstract
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Article provided by in its journal Public Finance Review.

Volume (Year): 40 (2012)
Issue (Month): 2 (March)
Pages: 240-269

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Handle: RePEc:sae:pubfin:v:40:y:2012:i:2:p:240-269
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  1. Luciano Fanti & Luca Spataro, 2008. "Poverty traps and intergenerational transfers," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 15(6), pages 693-711, December.
  2. repec:ebl:ecbull:v:10:y:2008:i:2:p:1-8 is not listed on IDEAS
  3. Zhang, Jie & Zhang, Junsen & Lee, Ronald, 2003. "Rising longevity, education, savings, and growth," Journal of Development Economics, Elsevier, vol. 70(1), pages 83-101, February.
  4. Andreas Wagener, 2003. "Equilibrium dynamics with different types of pay-as-you-go pension schemes," Economics Bulletin, AccessEcon, vol. 8(6), pages 1-12.
  5. Michel, Philippe & de la Croix, David, 2000. "Myopic and perfect foresight in the OLG model," Economics Letters, Elsevier, vol. 67(1), pages 53-60, April.
  6. Reichlin, Pietro, 1986. "Equilibrium cycles in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, vol. 40(1), pages 89-102, October.
  7. Luca Gori & Luciano Fanti, 2008. "Longevity and PAYG pension systems sustainability," Economics Bulletin, AccessEcon, vol. 10(2), pages 1-8.
  8. repec:ebl:ecbull:v:8:y:2003:i:6:p:1-12 is not listed on IDEAS
  9. Luciano Fanti & Luca Gori, 2009. "Longevity, fertility and PAYG pension systems sustainability," Discussion Papers 2009/77, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  10. van Groezen, Bas & Leers, Theo & Meijdam, Lex, 2003. "Social security and endogenous fertility: pensions and child allowances as siamese twins," Journal of Public Economics, Elsevier, vol. 87(2), pages 233-251, February.
  11. Zhang, Junsen & Zhang, Jie & Lee, Ronald, 2001. "Mortality decline and long-run economic growth," Journal of Public Economics, Elsevier, vol. 80(3), pages 485-507, June.
  12. Francisco Rodríguez & Daniel Ortega, 2006. "Are capital shares higher in poor countries? Evidence from Industrial Surveys," Wesleyan Economics Working Papers 2006-023, Wesleyan University, Department of Economics.
  13. Farmer, Roger E. A., 1986. "Deficits and cycles," Journal of Economic Theory, Elsevier, vol. 40(1), pages 77-88, October.
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