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Optimal Response to a Demographic Shock

  • Juan Carlos Conesa
  • Carlos Garriga

We examine the optimal policy response to an exogenously given demographic shock. Such a shock affects negatively the financing of retirement pensions, and we use optimal fiscal policy in order to determine the optimal strategy of the social security administration. Our approach provides specific policy responses in an environment that guarantees the financial sustainability of existing retirement pensions. At the same time, pensions will be financed in a way that by construction generates no welfare losses for any of the cohorts in our economy. In contrast to existing literature we endogenously determine optimal policies rather than exploring implications of exogenously given policies. Our results show that the optimal strategy is based in the following ingredients: elimination of compulsory retirement, a change in the structure of labor income taxation and a temporary increase in the level of government debt.

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Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 157.

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Date of creation: Sep 2015
Date of revision:
Handle: RePEc:bge:wpaper:157
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  1. Andres Erosa & Martin Gervais, 2000. "Optimal taxation in life-cycle economies," Working Paper 00-02, Federal Reserve Bank of Richmond.
  2. Michele Boldrin & Ana Montes, 2004. "The intergenerational state: education and pensions," Staff Report 336, Federal Reserve Bank of Minneapolis.
  3. Michele Boldrin & Aldo Rustichini, 2000. "Political Equilibria with Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 41-78, January.
  4. Thomas F. Cooley & Jorge Soares, 1999. "A Positive Theory of Social Security Based on Reputation," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 135-160, February.
  5. Hansen, G.D., 1991. "The Cyclical and Secular Behavior of the Labor Input : Comparing Efficiency Units and Hours Worked," Papers 36, California Los Angeles - Applied Econometrics.
  6. Karsten Jeske, 2003. "Pension systems and aggregate shocks," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 15-31.
  7. Carlos Garriga-Calvet, 2000. "Optimal Fiscal Policy in Overlapping Generations Models," Econometric Society World Congress 2000 Contributed Papers 1772, Econometric Society.
  8. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  9. Mariacristina De Nardi & Selahattin Imrohoglu & Thomas J. Sargent, 1998. "Projected U.S. demographics and social security," Working Paper Series WP-98-14, Federal Reserve Bank of Chicago.
  10. Grossman, Gene & Helpman, Elhanan, 1996. "Intergenerational Redistribution with Short-lived Governments," CEPR Discussion Papers 1396, C.E.P.R. Discussion Papers.
  11. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
  12. V. V. Chari & Patrick J. Kehoe, 1999. "Optimal Fiscal and Monetary Policy," NBER Working Papers 6891, National Bureau of Economic Research, Inc.
  13. Juan Carlos Conesa & Carlos Garriga, 2015. "Optimal Design of Social Security Reforms," Working Papers 140, Barcelona Graduate School of Economics.
  14. Douglas Gollin, 2002. "Getting Income Shares Right," Journal of Political Economy, University of Chicago Press, vol. 110(2), pages 458-474, April.
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