Fiscal multipliers in the most aged country: Empirical evidence and theoretical interpretation

Hiroshi Morita

No HIAS-E-100, Discussion paper series from Hitotsubashi Institute for Advanced Study, Hitotsubashi University

Abstract: This study investigates how population aging impacts the effectiveness of a government spending shock. We estimate a panel VAR model with prefectural data in Japan, the world’s fastest aging country and reveal that a government spending shock becomes less effective as the aging rate increases. Subsequently, we construct a New Keynesian model with workers and retirees, which can replicate our empirical findings. This highlights the role of the supply-side channel through which workers facing a liquidity constraint can benefit from increased disposable income, in generating the state-dependent effect of the government spending shock. Our theoretical finding may suggest that promoting labor market participation by elderly people could increase the effectiveness of a government spending shock amid a rapidly aging society.

Keywords: Population aging; Panel VAR model; New Keynesian model; Fiscal policy (search for similar items in EconPapers)
JEL-codes: C11 C23 E62 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2020-09
New Economics Papers: this item is included in nep-age, nep-dge and nep-mac
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https://hermes-ir.lib.hit-u.ac.jp/hermes/ir/re/31357/070_hiasDP-E-100.pdf

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Persistent link: https://EconPapers.repec.org/RePEc:hit:hiasdp:hias-e-100

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