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The Dynamics of an Aging Population: The Case of Four OECD Countries

  • Alan J. Auerbach
  • Laurence J. Kotlikoff
  • Robert Hagemann
  • Giuseppe Nicoletti

Demographic changes, such as those anticipated in most OECD countries, have many economics effects that impinge on a country's fiscal viability. Evaluation of the effects of associated changes in capital-labor ratios and the welfare and behavior of different generations requires the use of a dynamic general equilibrium model. The 75 generations - 250 year demographic simulation model, presented in Auerbach and Kotlikoff (1987, Chapter 11), has been modified to incorporate bequest behavior, technological change, the possibility that the economy is open to international trade, and government consumption expenditures that depend on the age composition of the population. The model has been further adapted to study the effects of impending demographic changes in Japan, the Federal Republic of Germany, Sweden and the United States. The simulation results indicate that these changes will have a major impact on rates of national saving, real wage rate and current accounts. One of this paper's fundamental lessons is that allowing for general equilibrium adjustments reduces the adverse welfare effects of increasing dependency ratios. Nevertheless, the welfare costs, and particularly their distributions across cohorts, pose serious challenges for policy makers in some cases.

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File URL: http://www.nber.org/papers/w2797.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2797.

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Date of creation: Feb 1989
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Publication status: published as OECD Economic Studies, No. 12, pp. 97-130, (Spring 1989).
Handle: RePEc:nbr:nberwo:2797
Note: AG PE
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  1. Laitner, John, 1990. "Tax Changes and Phase Diagrams for an Overlapping Generations Model," Journal of Political Economy, University of Chicago Press, vol. 98(1), pages 193-220, February.
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