Low Fertility and the Fiscal Limit: Inflation Possibilities in East Asia

Hyunduk Suh and Nathaniel Throckmorton

Working Papers from Economics Department, William & Mary

Abstract: This paper examines how very low fertility rates in East Asia might affect inflation in the face of fiscal limits. In a calibrated overlapping-generations model, low fertility rates cause the debt-to-GDP ratio to rise, which can push the tax rate to a political ceiling and force either monetary accommodation or reduced transfers to retirees. The fiscal limit creates inflationary pressure relative to a scenario with no fiscal limit, adding to our understanding of possible inflation outcomes in aging economies. Korea faces the strongest demographic headwind and is projected to experience the earliest fiscal limit and highest inflation rates, with inflation projected to peak roughly 10 years later and 2.5pp higher with a fiscal limit than without one. Taiwan’s more favorable initial fiscal conditions help reduce inflationary pressure, and China benefits from a delayed demographic transition that leads to lower inflation, despite worse initial fiscal conditions than Taiwan. In all countries, a higher tax rate ceiling or older retirement age effectively reduce peak inflation.

Keywords: low fertility; demographic transition; population aging; East Asia; overlapping generations model; fiscal sustainability; inflation projections (search for similar items in EconPapers)
JEL-codes: E52 E63 H63 J11 J13 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2025-07-16
New Economics Papers: this item is included in nep-age, nep-cna, nep-dge, nep-lab, nep-mac, nep-mon and nep-sea
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DOI: 10.21220/GH09-1662

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