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Aging and Deflation from a Fiscal Perspective

  • Hideki Konishi

    (School of Political Science and Economics, Waseda University (h.konishi@waseda.jp))

  • Kozo Ueda

    (School of Political Science and Economics, Waseda University (kozo.ueda@waseda.jp))

Negative correlations between inflation and demographic aging have been observed across developed nations recently. To understand the phenomenon from a political economy perspective, we embed the fiscal theory of the price level into an overlapping-generations model. We suppose that short-lived governments successively choose income tax rates and bond issues, considering political influence from existing generations and the expected policy responses of future governments. Our analysis reveals that the effects of aging depend on its causes; aging is deflationary when caused by an unexpected increase in longevity, but is inflationary when caused by a decline in the birth rate. Our analysis also sheds new light on the traditional debate about the burden of national debt. Because of price adjustment, the accumulation of government debt imposes no burden on future generations.

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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 13-E-13.

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Date of creation: Dec 2013
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Handle: RePEc:ime:imedps:13-e-13
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