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The young, the old, and the government: demographics and fiscal multipliers

Author

Listed:
  • Henrique S. Basso

    () (Banco de España)

  • Omar Rachedi

    () (Banco de España)

Abstract

We document that fiscal multipliers depend on the age structure of the population. Using the variation in military spending and birth rates across U.S. states, we show that local fiscal multipliers increase with the share of young people in total population. We rationalize this fact with a parsimonious life-cycle open-economy New Keynesian model with credit market imperfections. The model explains 65% of the relationship between local fiscal multipliers and demographics. We use the model to study the implications of population aging, and find that nowadays U.S. national fiscal multipliers are 36% lower than in 1980.

Suggested Citation

  • Henrique S. Basso & Omar Rachedi, 2018. "The young, the old, and the government: demographics and fiscal multipliers," Working Papers 1837, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:1837
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    File URL: https://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/18/Files/dt1837e.pdf
    File Function: First version, November 2018
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    Cited by:

    1. Alessio Moro & Omar Rachedi, 2018. "The changing structure of goverment consumption spending," Working Papers 1840, Banco de España;Working Papers Homepage.

    More about this item

    Keywords

    life-cycle; population aging; fiscal policy;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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