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The Age for Austerity? Population Age Structure and Fiscal Multipliers

Joseph Kopecky ()

Economic Papers from Trinity College Dublin, Economics Department

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 demographics. Broadly speaking, these relationships suggest that population age structure may have exerted negative pressure on fiscal multipliers over the period from the 1980s to the mid 2000s. Projecting forward, this effect is less clear. Simple, one variable, controls for population age suggest that multipliers estimated from spending cuts may grow again as countries move from middle to old-aged. However, these are weakly estimated for tax increases. Controlling for movements across the entire age distribution suggests that tax shocks may have stronger state dependence, with mixed implications over the sample period, but uniform pressure on these multipliers to ard zero as economies continue to age. These findings give hope that the age for austerity may arrive just in time to deal with looming debts, and suggest that more work to understand the mechanisms behind this relationship will be valuable.

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)
Pages: 34 pages
Date: 2021-12
New Economics Papers: this item is included in nep-age and nep-mac
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