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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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    7. Aurelien Eyquem & Masahige Hamano, 2022. "Aging, Fertility and Macroeconomic Dynamics," Working Papers 2121, Waseda University, Faculty of Political Science and Economics.
    8. Eric M. Leeper, 2015. "Fiscal Analysis is Darned Hard," NBER Working Papers 21822, National Bureau of Economic Research, Inc.
    9. 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.
    10. 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.
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    18. Fedotenkov, Igor, 2015. "Population ageing and prices in an OLG model with money created by credits," MPRA Paper 66056, University Library of Munich, Germany.
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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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