The age for austerity? Population age structure and fiscal consolidation multipliers

Joseph Kopecky

Journal of Macroeconomics, 2022, vol. 73, issue C

Abstract: Advanced economies face two important trends: population aging and rising debt. In the coming years, it will be critical to understand how policies undertaken by governments interact with their changing age structures. In a panel of advanced economies, I show that fiscal deficit consolidation multipliers are highly sensitive to changes in population age. The demographic transmission of fiscal shocks differs between spending cuts and tax hikes, with important variation within working age and across dependent groups. Tax increases lead to weaker output response in relatively young economies, strengthening as population weights move to middle age, and falling again with large shares of retirees. Output response to spending, on the other hand, shows little change with demographics. The transmission of both policies to fiscal deficits suggests significant age dependence, with important impacts on multipliers when constructed as the ratio of cumulative output and deficit effects. Projecting forward, my estimates expect smaller multipliers as the baby boomer cohort fully retires, with demographics accommodating both tax and spending consolidations in terms of stronger deficit improvements, with tax policy displaying weaker output response.

Keywords: Fiscal policy; Fiscal multipliers; Population aging; Demographic change (search for similar items in EconPapers)
JEL-codes: E62 H24 H30 H31 J11 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:73:y:2022:i:c:s0164070422000416

DOI: 10.1016/j.jmacro.2022.103444

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