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Demographic Uncertainty and Labour Market Imperfections in Small Open Economy

Author

Listed:
  • Juha Kilponen

    (Bank of Finland)

  • Helvi Kinnunen

    (Bank of Finland)

  • Antti Ripatti

    (Bank of Finland)

Abstract

This paper extends Gertler's (1999) tractable overlapping generations model by allowing for imperfect labour markets and distortionary taxation. Furthermore, we allow for stochastic variation in demographic structure. The model is then used to study demographic change in a small open economy of Finland. The simulations highlight a key role played by labour market imperfections in determining a fiscal burden of ageing in defined benefit pensions systems. Higher labour market imperfections lead into considerably stronger responses of labour supply and taxes on ageing. Thus, imperfections magnify the problem associated with fiscal sustainability in ageing society. Higher labour market imperfections lead into considerably stronger responses of labour supply and taxes on ageing. Thus, imperfections magnify the problem associated with fiscal sustainability in ageing society. Stochastic simulations suggest that lengthening of working time has rather minor impact on alleviating the fiscal burden of ageing. Only a small fraction of the stochastic variation in endogenously determined contribution rate is explained by the stochastic variation in the lenght of working time. Variation in fertility rate is clearly more important.

Suggested Citation

  • Juha Kilponen & Helvi Kinnunen & Antti Ripatti, 2006. "Demographic Uncertainty and Labour Market Imperfections in Small Open Economy," Computing in Economics and Finance 2006 227, Society for Computational Economics.
  • Handle: RePEc:sce:scecfa:227
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    File URL: http://repec.org/sce2006/up.22712.1140782609.pdf
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    References listed on IDEAS

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    1. Roger E. A. Farmer, 1990. "RINCE Preferences," The Quarterly Journal of Economics, Oxford University Press, vol. 105(1), pages 43-60.
    2. Robert Fenge & Martin Werding, 2003. "Ageing and Fiscal Imbalances Across Generations: Concepts of Measurement," CESifo Working Paper Series 842, CESifo Group Munich.
    3. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    4. Kilponen, Juha & Ripatti, Antti, 2006. "Labour and product market competition in a small open economy – Simulation results using a DGE model of the Finnish economy," Research Discussion Papers 5/2006, Bank of Finland.
    5. Christian Keuschnigg & Mirela Keuschnigg, 2004. "Aging, Labor Markets, and Pension Reform in Austria," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(3), pages 359-359, September.
    6. Gertler, Mark, 1999. "Government debt and social security in a life-cycle economy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, pages 61-110.
    7. Kilponen Juha, Santavirta Torsten, 2004. "Competition and Innovation - Microeconometric Evidence using Finnish Data," Research Reports 113, VATT Institute for Economic Research.
    8. Ripatti, Antti & Vilmunen, Jouko, 2001. "Declining labour share : Evidence of a change in the underlying production technology," Research Discussion Papers 10/2001, Bank of Finland.
    9. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
    10. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, vol. 40(3-5), pages 1007-1021, April.
    11. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    12. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    13. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
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    Cited by:

    1. Fujiwara, Ippei & Teranishi, Yuki, 2008. "A dynamic new Keynesian life-cycle model: Societal aging, demographics, and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2398-2427, August.
    2. Vanda Almeida & Gabriela Castro & Ricardo Félix, 2010. "Improving competition in the non-tradable goods and labour markets: the Portuguese case," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 9(3), pages 163-193, December.
    3. Ripatti, Antti, 2008. "'A dynamic new Keynesian life-cycle model: Societal aging, demographics, and monetary policy' by Ippei Fujiwara and Yuki Teranishi. A comment," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2507-2511, August.

    More about this item

    Keywords

    Demographics; Uncertainty; DSGE; Labour Markets;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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