The Young, the Old, and the Government: Demographics and Fiscal Multipliers

Basso, Henrique S.; Rachedi, Omar

doi:10.2139/ssrn.3280178

Cited by 51 publications

(22 citation statements)

References 84 publications

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“…Brinca et al (2017) show that cross -country differences in income inequality can account for significant differences in the observed impacts of fiscal consolidation programs. This same mechanism is behind other theories that have been brought forth in accounting for the observed heterogeneity of output responses to fiscal shocks - Basso and Rachedi (2018) show that differences in population age structures across U.S. states explain differences in fiscal multipliers, precisely because younger agents are more likely to be credit constrained.…”

Section: Introductionmentioning

confidence: 56%

Asset Liquidity and Fiscal Consolidation Programs

Bernardino¹

2020

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We argue that the relationship between wealth inequality and fiscal multipliers depends crucially on the type of fiscal experiment used, and on the measure of wealth distribution. We calibrate an overlapping generations model with incomplete markets for different European economies and use Household Finance and Consumption Survey (HFCS) data to compare fiscal multipliers when models are calibrated to match the distribution of gross vs. net wealth. We find a negative relationship between fiscal multipliers and wealth inequality when considering fiscal consolidation programs, in contrast to fiscal expansion experiments which are standard in the literature. The underlying mechanism relies on the relationship between the distribution of wealth and the share of credit‑ constrained agents. We examine the role of household balance sheet compositions regarding asset liquidity and find that when calibrating the model to match liquid wealth, the relationship between wealth inequality and fiscal multipliers is much stronger.

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Section: Introductionmentioning

confidence: 56%

Asset Liquidity and Fiscal Consolidation Programs

Bernardino¹

2020

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“…They find that less labor supply due to population aging weakens the effectiveness of fiscal policy. Basso and Rachedi (2019) find that local fiscal multipliers depend on the age structure of the population by using the U.S. state-level data (such that fiscal multipliers are larger in economies with higher shares of young people in the total population). 6 They rationalize this finding with a life-cycle open-economy New Keynesian model.…”

Section: Literature Reviewmentioning

confidence: 98%

“…While there are a few studies that examine how population aging affects the effectiveness of macroeconomic policies, they focus on monetary policy or are theoretical (see the literature review in Section II). The only exception is Basso and Rachedi (2019). By using the U.S. state-level data, they find that the age structure of the population affects local fiscal multipliers (such that fiscal multipliers are larger in economies with higher shares of young people in the total population).…”

Section: Introductionmentioning

confidence: 99%

Would Population Aging Change the Output Effects of Fiscal Policy?

Honda¹,

Miyamoto²

2020

IMF Working Papers

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Would population aging affect the effectiveness of fiscal stimulus? Despite the renewed focus on population aging, there are few empirical studies on the output effects of fiscal policy in aging economies. Our study fills this gap by analyzing this issue in OECD countries. We find that, as population ages, the output effects of fiscal spending shocks are weakened. We also find that, while high-debt countries generally face weaker fiscal multipliers, high-debt aging economies face even weaker multipliers. These results point to important policy implications: population aging would call for a larger fiscal stimulus to support aggregate demand during recession and thus require larger fiscal space to allow a wider swing of the fiscal position without creating concerns for fiscal sustainability. Our analysis also suggests that policy measures to promote labor supply could help increase the output effect of fiscal stimulus in aging economies.

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“…Dolls et al [93] evaluate the effect of demographic changes between 2010 and 2030 on labor force participation and government budgets in the EU-27. Basso and Rachedi [94] document that fiscal multipliers depend on the age structure of the population, decreasing with the share of old people in the total population.…”

Section: Literature Reviewmentioning

confidence: 99%

Fiscal Sustainability in Aging Societies: Evidence from Euro Area Countries

Ramos-Herrera

Sosvilla‐Rivero

2020

Sustainability

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Fiscal sustainability remains a paramount challenge in the Euro Area (EA) countries after the sharp rise in public debt-to-GDP ratios in the aftermath of the financial crisis of 2008. Using data from 11 EA countries over the period 1980–2019, we apply panel data techniques to examine the effects of population aging on fiscal sustainability, controlling for key macroeconomic variables. Our results suggest that the discretionary fiscal policy is strongly persistent, not being consistent with long-term fiscal solvency. Moreover, our results indicate that the fiscal stance is countercyclical for the countries under study and that population aging poses a major challenge for fiscal sustainability. The findings are robust to a different grouping of countries within the sample (core and peripheral countries, relatively old and young countries, and relatively more and less indebted countries). We consider that our results may have some practical meaning for national policymakers and international organizations responsible for regional and global fiscal surveillance and might shed some light on the possible effects that population aging could have on the effort of EA countries to restore public finances on a sustainable basis.

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The Young, the Old, and the Government: Demographics and Fiscal Multipliers

Cited by 51 publications

References 84 publications

Asset Liquidity and Fiscal Consolidation Programs

Asset Liquidity and Fiscal Consolidation Programs

Would Population Aging Change the Output Effects of Fiscal Policy?

Fiscal Sustainability in Aging Societies: Evidence from Euro Area Countries

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