Aging and Deflation from a Fiscal Perspective
Mitsuru Katagiri (),
Hideki Konishi () and
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Mitsuru Katagiri: Bank of Japan
Hideki Konishi: School of Political Science and Economics, Waseda University
No 905, KIER Working Papers from Kyoto University, Institute of Economic Research
Negative correlations between inflation and demographic aging were observed across developed nations recently. To understand the phenomenon from a politico-economic perspective, we embed the fiscal theory of the price level into an overlapping-generations model. In the model, successive short-lived governments choose income tax rates and bond issues considering the political influence of existing generations and the policy response of future governments. The model sheds new light on the traditional debate about the burden of national debt. Because of price adjustments, the accumulation of government debt does not become a burden on future generations. Our analysis reveals that the effects of aging depend on its causes. Aging is deflationary when caused by an increase in longevity but inflationary when caused by a decline in birth rate. Numerical simulation shows that aging over the past 40 years in Japan generated deflation of about 0.6 percentage points annually.
Keywords: Deflation, Fiscal theory of the price level; Politico-economic equilibrium (search for similar items in EconPapers)
JEL-codes: D72 E30 E62 E63 H60 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age, nep-dge and nep-mac
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Working Paper: Aging and deflation from a fiscal perspective (2014)
Working Paper: Aging and Deflation from a Fiscal Perspective (2014)
Working Paper: Aging and Deflation from a Fiscal Perspective (2013)
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