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Ageing and fiscal sustainability in a small euro area economy

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  • Cláudia Braz
  • Gabriela Castro
  • José R. Maria
  • Paulo Júlio
  • Ricardo Mourinho Félix

Abstract

Population ageing is a key trend in Western economies. The impact of this trend will be widespread, affecting investment and saving decisions over the next decades, and represents a major challenge to policymakers. Debt sustainability issues in euro area economies may (re)emerge, particularly given the pay-as-you-go nature of most public pension systems. In a decentralised fiscal policy framework, ageing and the respective policy response might intensify the latent macroeconomic imbalances that underlie the ongoing sovereign debt crisis. In this paper, we include a stylised pension system in an open economy New-Keynesian general equilibrium model with non-Ricardian agents. The model is used to assess the macroeconomic impacts of ageing in a small euro area economy. The results suggest that the impact can be significant, depending on the magnitude and pace of the ageing dynamics, the existing rules for social benefits and the policy response. It can be inferred from the results that supranational policy coordination at euro area level is crucial to foster economic and financial stability.

Suggested Citation

  • Cláudia Braz & Gabriela Castro & José R. Maria & Paulo Júlio & Ricardo Mourinho Félix, 2013. "Ageing and fiscal sustainability in a small euro area economy," Working Papers w201304, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w201304
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    3. María del Carmen Ramos-Herrera & Simón Sosvilla-Rivero, 2020. "Fiscal Sustainability in Aging Societies: Evidence from Euro Area Countries," Sustainability, MDPI, vol. 12(24), pages 1-20, December.
    4. Daniel Baksa & Mihnea Constantinescu & Zsuzsa Munkacsi, 2016. "Aging, Informality and Public Policies in a Small Open Economy," Bank of Lithuania Discussion Paper Series 2, Bank of Lithuania.
    5. Daniel Baksa & Zsuzsa Munkacsi, 2016. "A Detailed Description of OGRE, the OLG Model," Bank of Lithuania Working Paper Series 31, Bank of Lithuania.
    6. Kazutoshi Miyazawa & Hikaru Ogawa & Toshiki Tamai, 2018. "Tax Competition and Fiscal Sustainability," CIRJE F-Series CIRJE-F-1104, CIRJE, Faculty of Economics, University of Tokyo.
    7. Masuch, Klaus & Anderton, Robert & Setzer, Ralph & Benalal, Nicholai, 2018. "Structural policies in the euro area," Occasional Paper Series 210, European Central Bank.
    8. Kristina Karagyozova-Markova, 2016. "Evaluating the effects of population ageing on long-term growth and pension system sustainability in Bulgaria through an overlapping generations model," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 59-78.
    9. Huan Wang & Jianyuan Huang & Shuangyue Sun, 2019. "Assessment of the Financial Sustainability of China’s New Rural Pension Plan: Does the Demographic Policy Reform Matter?," Sustainability, MDPI, vol. 11(18), pages 1-22, September.
    10. Miyazawa, Kazutoshi & Ogawa, Hikaru & Tamai, Toshiki, 2019. "Capital market integration and fiscal sustainability," European Economic Review, Elsevier, vol. 120(C).
    11. Mădălina Gabriela ANGHEL & Constantin ANGHELACHE, 2018. "Analysis of the evolution of the number of pensioners and pensions in Romania," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 0(2(615), S), pages 187-194, Summer.
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