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Population ageing in a small open economy – some policy experiments with a tractable general equilibrium model

  • Kilponen , Juha

    ()

    (Bank of Finland Research)

  • Kinnunen , Helvi

    ()

    (Bank of Finland)

  • Ripatti , Antti

    ()

    (Bank of Finland)

This paper extends Gertler’s (1999) tractable overlapping generations model with life-cycle features by allowing for distortionary taxation, demographic transition and stochastic variation in demographic structure. The model is then used to study demographic change in the small open economy of Finland. Simulations highlight the key role played by labour market responses to ageing. When the responses of labour supply, wages, and hence private consumption, to higher taxation are consistently accounted for, population ageing has clearly much larger effects on public finance, when compared to mechanical sustainability calculations. Stochastic simulations suggest that lengthening of working time has only a modest alleviating effect on the fiscal burden of ageing. This is due to the fact that stochastic variation in the length of working time has only a relatively small effect on the model’s dependency ratio. Variation in life expectancy is clearly much more important.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0628netti.pdf
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Paper provided by Bank of Finland in its series Research Discussion Papers with number 28/2006.

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Length: 45 pages
Date of creation: 23 Dec 2006
Date of revision:
Handle: RePEc:hhs:bofrdp:2006_028
Contact details of provider: Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/

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  1. Christian Keuschnigg & Mirela Keuschnigg, 2004. "Aging, Labor Markets and Pension Reform in Austria," University of St. Gallen Department of Economics working paper series 2004 2004-03, Department of Economics, University of St. Gallen.
  2. Olivier J. Blanchard, 1984. "Debt, Deficits and Finite Horizons," NBER Working Papers 1389, National Bureau of Economic Research, Inc.
  3. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  4. Juha Kilponen & Torsten Santavirta, 2004. "Competition and Innovation - Microeconometric Evidence using Finnish Data," Research Reports 113, Government Institute for Economic Research Finland (VATT).
  5. Railavo , Jukka, 2004. "Stability consequences of fiscal policy rules," Research Discussion Papers 1/2004, Bank of Finland.
  6. Betts, Caroline & Devereux, Michael B., 2000. "Erratum to "Exchange rate dynamics in a model of pricing-to-market": [Journal of International Economics 50 (2000) 214-244]," Journal of International Economics, Elsevier, vol. 52(1), pages 207-208, October.
  7. Robert Fenge & Martin Werding, 2003. "Ageing and Fiscal Imbalances Across Generations: Concepts of Measurement," CESifo Working Paper Series 842, CESifo Group Munich.
  8. Gertler, Mark, 1997. "Government Debt and Social Security in a Life-Cycle Economy," Working Papers 97-14, C.V. Starr Center for Applied Economics, New York University.
  9. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, March.
  10. Farmer, Roger E A, 1990. "Rince Preferences," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 43-60, February.
  11. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, vol. 40(3-5), pages 1007-1021, April.
  12. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
  13. Freystätter, Hanna, 2003. "Price setting behavior in an open economy and the determination of Finnish foreign trade prices," Scientific Monographs E:25/2003, Bank of Finland.
  14. Jukka Railavo, 2004. "Stability consequences of fiscal policy rules," Macroeconomics 0404020, EconWPA.
  15. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
  16. Cooley, Thomas F., 1999. "Government debt and social security in a life-cycle economy : A comment," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 111-117, June.
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