A Tradeoff between the Output and Net Foreign Asset Effects of Pension Reform

Mario Catalán and Nicolas Magud

Open Economies Review, 2017, vol. 28, issue 4, No 4, 685-709

Abstract: Abstract We use an overlapping generations model of a small open economy with perfect capital mobility to evaluate the long-term effects of pension reforms on output and net foreign assets. We compare reforms that achieve similar fiscal targets and show the existence of a tradeoff. Reforms that increase the retirement age have an expansionary effect on output, but a small (and oftentimes) negative effect on the net foreign asset position. In contrast, reforms that cut pension benefits improve the net foreign asset position but reduce output. Only mixed reforms that increase the retirement age and cut pension benefits sufficiently can boost both output and net foreign assets.

Keywords: F41; H55; Pension reform; Net foreign asset position; Overlapping generations; Small open economy (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1007/s11079-016-9429-5

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