Sustainable Fiscal Strategies under Changing Demographics

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

This paper develops an overlapping generations model to evaluate, first, the steady state growth-maximizing level of public debt around which an economy needs to stabilise; second, how the optimal level of public debt varies as a function of key population parameters; third, how fiscal rules designed to stabilise the economy around that debt level need to vary with the population parameters; and, fourth, how well the model performs as a reasonable and plausible representation of the advanced economies that face fiscal strain and deteriorating demographics. The main conclusion is: despite diminished fiscal space and flexibility due to deteriorating population parameters, a relatively benign steady state is feasible and available under mild fiscal restraints. The bigger problem will be how to get there without financial or fiscal breakdowns along the way. We offer some political economy perspectives on how best to manage that risk.
This paper develops an overlapping generations model to evaluate, first, the steady state growth-maximizing level of public debt around which an economy needs to stabilise; second, how the optimal level of public debt varies as a function of key population parameters; third, how fiscal rules designed to stabilise the economy around that debt level need to vary with the population parameters; and, fourth, how well the model performs as a reasonable and plausible representation of the advanced economies that face fiscal strain and deteriorating demographics. The main conclusion is: despite diminished fiscal space and flexibility due to deteriorating population parameters, a relatively benign steady state is feasible and available under mild fiscal restraints. The bigger problem will be how to get there without financial or fiscal breakdowns along the way. We offer some political economy perspectives on how best to manage that risk.
LanguageEnglish
JournalEuropean Journal of Political Economy
Volume57
Pages34-52
Number of pages19
ISSN0176-2680
DOIs
StatePublished - Mar 2019

Keywords

  • Fiscal rules
  • Public debt
  • Economic growth
  • Demographic changes

Cite this

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title = "Sustainable Fiscal Strategies under Changing Demographics",
abstract = "This paper develops an overlapping generations model to evaluate, first, the steady state growth-maximizing level of public debt around which an economy needs to stabilise; second, how the optimal level of public debt varies as a function of key population parameters; third, how fiscal rules designed to stabilise the economy around that debt level need to vary with the population parameters; and, fourth, how well the model performs as a reasonable and plausible representation of the advanced economies that face fiscal strain and deteriorating demographics. The main conclusion is: despite diminished fiscal space and flexibility due to deteriorating population parameters, a relatively benign steady state is feasible and available under mild fiscal restraints. The bigger problem will be how to get there without financial or fiscal breakdowns along the way. We offer some political economy perspectives on how best to manage that risk.",
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Sustainable Fiscal Strategies under Changing Demographics. / Hallett, Andrew Hughes ; Hougaard Jensen, Svend E.; Sveinsson, Thorsteinn Sigurdur; Vieira, Filipe.

In: European Journal of Political Economy, Vol. 57, 03.2019, p. 34-52.

Research output: Contribution to journalJournal articleResearchpeer-review

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