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Aging and Deflation from a Fiscal Perspective

Author

Listed:
  • Mitsuru Katagiri

    () (Bank of Japan)

  • Hideki Konishi

    () (Faculty of Political Science and Economics, Waseda University)

  • Kozo Ueda

    () (Faculty of Political Science and Economics, Waseda University)

Abstract

Negative correlations between inflation and demographic aging were observed across developed nations recently. To understand the phenomenon from a politico-economic perspective, we embed the fiscal theory of the price level into an overlapping-generations model. In the model, successive short-lived governments choose income tax rates and bond issues considering the political influence of existing generations and the policy response of future governments. The model sheds new light on the traditional debate about the burden of national debt. Because of price adjustments, the accumulation of government debt does not become a burden on future generations. Our analysis reveals that the effects of aging depend on its causes. Aging is deflationary when caused by an increase in longevity but inflationary when caused by a decline in birth rate. Numerical simulation shows that aging over the past 40 years in Japan generated deflation of about 0.6 percentage points annually.

Suggested Citation

  • Mitsuru Katagiri & Hideki Konishi & Kozo Ueda, 2014. "Aging and Deflation from a Fiscal Perspective," Working Papers 1413, Waseda University, Faculty of Political Science and Economics.
  • Handle: RePEc:wap:wpaper:1413
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Ageing and deflation in Japan
      by Economic Logician in Economic Logic on 2014-01-28 21:49:00
    2. Le vieillissement démographique est-il déflationniste ?
      by ? in D'un champ l'autre on 2014-09-15 03:55:00

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    2. FUJITA Shigeru & FUJIWARA Ippei, 2015. "Declining Trends in the Real Interest Rate and Inflation: Role of aging," Discussion papers 15140, Research Institute of Economy, Trade and Industry (RIETI).
    3. Abdoulaye Millogo & Jean-François Rouillard, 2019. "Missing Disinflation and Human Capital Depreciation," Cahiers de recherche 19-03, Departement d'Economique de l'École de gestion à l'Université de Sherbrooke, revised Oct 2020.
    4. Hirokuni Iiboshi & Mototsugu Shintani & Kozo Ueda, 2018. "Estimating a nonlinear new Keynesian model with the zero lower bound for Japan," CAMA Working Papers 2018-37, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    5. Tetsuo Ono & Yuki Uchida, 2018. "Political Economy of Taxation, Debt Ceilings, and Growth," Discussion Papers in Economics and Business 18-22, Osaka University, Graduate School of Economics.
    6. Zongwu Cai & Jiazi Chen & Linlin Niu, 2021. "A Semiparametric Model for Bond Pricing with Life Cycle Fundamental," Working Papers 2021-01-06, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    7. Mateo Zokalj, 2016. "The impact of population aging on public finance in the European Union," Financial Theory and Practice, Institute of Public Finance, vol. 40(4), pages 383-412.
    8. Barbiellini Amidei, Federico & Gomellini, Matteo & Piselli, Paolo, 2019. "The price of demography," MPRA Paper 94435, University Library of Munich, Germany.
    9. Fedotenkov, Igor, 2015. "Population ageing and prices in an OLG model with money created by credits," MPRA Paper 66056, University Library of Munich, Germany.
    10. Zongwu Cai & Jiazi Chen & Linlin Liu, 2021. "Interest Rates and Aggregate Life Cycle Determinants," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 202102, University of Kansas, Department of Economics, revised Jan 2021.
    11. FUJIWARA Ippei & HORI Shunsuke & WAKI Yuichiro, 2019. "Generational War on Inflation: Optimal Inflation Rates for the Young and the Old," Discussion papers 19021, Research Institute of Economy, Trade and Industry (RIETI).
    12. Johnston, Lauren A., 2020. "China’s Economic Demography Transition Strategy: A Population Weighted Approach to the Economy and Policy," GLO Discussion Paper Series 593, Global Labor Organization (GLO).
    13. Kenichi Sakura, 2020. "Comments on "Can an ageing workforce explain low inflation?"," BIS Papers chapters, in: Bank for International Settlements (ed.), Inflation dynamics in Asia and the Pacific, volume 111, pages 81-84, Bank for International Settlements.
    14. Eric M. Leeper, 2015. "Fiscal Analysis is Darned Hard," CAEPR Working Papers 2015-021, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    15. Fedotenkov, Igor, 2018. "Population ageing and inflation with endogenous money creation," Research in Economics, Elsevier, vol. 72(3), pages 392-403.
    16. Dantas Guimarães, Silvana & Ferreira Tiryaki, Gisele, 2020. "The impact of population aging on business cycles volatility: International evidence," The Journal of the Economics of Ageing, Elsevier, vol. 17(C).
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    More about this item

    Keywords

    Fiscal theory of the price level; Politico-economic equilibrium;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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