Would Population Aging Change the Output Effects of Fiscal Policy?

Jiro Honda and Hiroaki Miyamoto

No 2020/092, IMF Working Papers from International Monetary Fund

Abstract: 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.

Keywords: WP; output effect; government spending shock; Fiscal Policy; Fiscal Multipliers; Population Aging; aging economy; business cycle; dummy variable; aggregate demand; Aging; Fiscal stimulus; Global; output-boosting effect; output response; Ricardian effect; positive government spending shock; fiscal spending shock; output effects of consumption shock; fiscal policy shock; labor supply; sign of government spending shock matter (search for similar items in EconPapers)
Pages: 23
Date: 2020-06-12
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Citations: View citations in EconPapers (8)

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