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Demographic Changes in a Small Open Economy with Endogenous Time Allocation and Age-Dependent Mortality

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  • João Pereira

Abstract

We calibrate an endogenous overlapping generations model of a small open economy to study the effects of population aging and population decline. In an invariant scenario public and foreign debt explode and GDP growth decreases markedly. Among the tested policies to control public nances, the best for the individuals is an increase in the retirement age, which needs to increase 6 years, a similar magnitude as the increase in life expectancy at birth. However, this increase has to happen before the increase in life expectancy materi- alizes itself. Aging has a stronger negative impact on public debt than population decline. We find a positive, but quantitatively modest, behavioral effect in reaction to a higher life expectancy with an impact on the GDP growth rate of only 2 basis points.

Suggested Citation

  • João Pereira, 2019. "Demographic Changes in a Small Open Economy with Endogenous Time Allocation and Age-Dependent Mortality," Working Papers REM 2019/63, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp0632019
    as

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    File URL: https://rem.rc.iseg.ulisboa.pt/wps/pdf/REM_WP_063_2019.pdf
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    References listed on IDEAS

    as
    1. Jones, Charles I & Williams, John C, 2000. "Too Much of a Good Thing? The Economics of Investment in R&D," Journal of Economic Growth, Springer, vol. 5(1), pages 65-85, March.
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    More about this item

    Keywords

    Open Economy; Time Allocation; PAYG pensions; Debt;
    All these keywords.

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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