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Government funds and demographic transition – alleviating ageing costs in a small open economy

  • Kinnunen, Helvi

    ()

    (Bank of Finland Research)

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    This paper investigates public pension funding using a dynamic general equilibrium macroeconomic model (DSGE) that facilitates investigation of distortionary effects of fiscal and pension policy responses to ageing. The model is calibrated to the Finnish economy, which will encounter substantial ageing pressures in the near future. During the transition to an older population structure ageing costs can be substantially lowered by allowing public funds to smooth out the tax responses. Cutting down on pension prefunding at a time when the pace of ageing is at its peak reduces the necessary tax hikes and stimulates labour supply growth at the moment when the labour market is tightest. With smaller funding needs, ageing leads to a slower growth in labour costs, a better employment conditions and faster production growth.

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    File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0821netti.pdf
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    Paper provided by Bank of Finland in its series Research Discussion Papers with number 21/2008.

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    Length: 39 pages
    Date of creation: 23 Sep 2008
    Date of revision:
    Handle: RePEc:hhs:bofrdp:2008_021
    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 Jaag & Christian Keuschnigg & Mirela Keuschnigg, 2007. "Pension Reform, Retirement and Life-Cycle Unemployment," University of St. Gallen Department of Economics working paper series 2007 2007-43, Department of Economics, University of St. Gallen.
    2. Alexander Ludwig & Joachim Winter, 2003. "Aging, pension reform, and capital flows: A multi-country simulation model," MEA discussion paper series 03028, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    3. Lans Bovenberg & Thijs Knaap, 2005. "Ageing, Funded Pensions and the Dutch Economy," CESifo Working Paper Series 1403, CESifo Group Munich.
    4. S. Rao Aiyagari & Ellen R. McGrattan, 1997. "The optimum quantity of debt," Staff Report 203, Federal Reserve Bank of Minneapolis.
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    7. Walter Fisher & Christian Keuschnigg, 2010. "Pension reform and labor market incentives," Journal of Population Economics, Springer, vol. 23(2), pages 769-803, March.
    8. Martin Feldstein, 2005. "Rethinking Social Insurance," NBER Working Papers 11250, National Bureau of Economic Research, Inc.
    9. Valkonen, Tarmo, 2002. "Demographic Uncertainty and Taxes," Discussion Papers 816, The Research Institute of the Finnish Economy.
    10. Daniel Leigh & Etibar Jafarov, 2007. "Alternative Fiscal Rules for Norway," IMF Working Papers 07/241, International Monetary Fund.
    11. Hewitt, Paul S., 2004. "The Economic and Financial Market Consequences of Global Ageing by Kieran McMorrow and Werner Roeger, Springer Verlag, 2004, ISBN 0892063939, 345 pages, Price $99.00," Journal of Pension Economics and Finance, Cambridge University Press, vol. 3(02), pages 255-257, July.
    12. 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.
    13. 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.
    14. Richard Hemming, 1998. "Should Public Pensions Be Funded?," IMF Working Papers 98/35, International Monetary Fund.
    15. Attanasio, Orazio & Kitao, Sagiri & Violante, Giovanni L., 2007. "Global demographic trends and social security reform," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 144-198, January.
    16. Nickel, Christiane & Rother, Philipp & Theophilopoulou, Angeliki, 2008. "Population ageing and public pension reforms in a small open economy," Working Paper Series 0863, European Central Bank.
    17. Mitchell, Peter R. & Sault, Joanne E. & Wallis, Kenneth F., 2000. "Fiscal policy rules in macroeconomic models: principles and practice," Economic Modelling, Elsevier, vol. 17(2), pages 171-193, April.
    18. Lucas, Deborah, 2007. "Comment on "Global demographic trends and social security reform" by Orazio Attanasio, Sagiri Kitao, and Giovanni Violante," Journal of Monetary Economics, Elsevier, vol. 54(1), pages 199-204, January.
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