Fiscal multipliers in the most aged country: Empirical evidence and theoretical interpretation
Abstract:
This study investigates how population aging impacts the effectiveness of a government spending shock. We estimate a panel VAR model with prefectural data in Japan, the world’s fastest aging country and reveal that a government spending shock becomes less effective as the aging rate increases. Subsequently, we construct a New Keynesian model with workers and retirees, which can replicate our empirical findings. This highlights the role of the supply-side channel through which workers facing a liquidity constraint can benefit from increased disposable income, in generating the state-dependent effect of the government spending shock. Our theoretical finding may suggest that promoting labor market participation by elderly people could increase the effectiveness of a government spending shock amid a rapidly aging society.
Report No.: | HIAS-E-100 |
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Author(s): | Hiroshi Morita |
Affiliation: | Hosei University |
Issued Date: | September 2020 |
Keywords: | Population aging; Panel VAR model; New Keynesian model; Fiscal policy |
JEL: | E62, C11, C23 |
Links: | PDF, HERMES-IR, RePEc |