An Effect of Population Aging on the Effectiveness of Fiscal Policy: Analysis using a panel VAR model

Hiroshi Morita and Hidekazu Niwa
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Hiroshi Morita: Associate Professor, Hosei University
Hidekazu Niwa: PhD student, Hitotsubashi University

Public Policy Review, 2021, vol. 17, issue 3, 1-20

Abstract: We examine how population aging changes the macroeconomic effects of fiscal policy using prefectural-level panel data in Japan. We select two groups from prefectures that are ranked in terms of the rates of population aging, and then estimate a panel VAR (vector autoregression) model for each group. In order to identify a structural shock to government spending and analyze its effects on the macroeconomy, we use sign restrictions, which are set consistently with computed impulse responses in a dynamic stochastic general equilibrium model. A key feature of this theoretical model is that it takes into consideration the presence of retirees in order to capture changes in demographics due to population aging. The estimation results indicate that aging leads to a decline in the effectiveness of spending. Moreover, we find that a way employee compensation responses also varies with aging. This implies that some effects of aging on labor markets may have contributed to the decline in the effectiveness of spending.

Keywords: population aging; fiscal multiplier; dynamic general equilibrium model; panel VAR model (search for similar items in EconPapers)
JEL-codes: C32 C33 E62 (search for similar items in EconPapers)
Date: 2021
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