How does population aging affect the effectiveness of fiscal stimulus over the business cycle?
Jiro Honda and
Journal of Macroeconomics, 2021, vol. 68, issue C
What is the impact of population aging on the effectiveness of fiscal stimulus over the business cycle? We address this question by estimating state-dependent fiscal multipliers in member countries of the Organisation for Economic Co-operation and Development (OECD). A government spending shock is identified as a forecast error of government spending and its output effect is estimated by using the local projection method. We find that there is no effect of population aging on output effects of fiscal spending shocks in expansionary times, whereas in recessions the output effects of fiscal spending shocks are weakened as population ages. This result points to important policy implications in that population aging would call for a larger fiscal stimulus to support aggregate demand during recession. Thus, this requires a larger fiscal space to allow for a wider swing of the fiscal position without creating concerns for fiscal sustainability.
Keywords: Fiscal policy; Fiscal multipliers; Population aging; Business cycles (search for similar items in EconPapers)
JEL-codes: E62 H30 J10 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:68:y:2021:i:c:s0164070421000021
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