Research Discussion Papers, Bank of Finland
Population ageing in a small open economy – some policy experiments with a tractable general equilibrium model
(), Helvi Kinnunen
() and Antti Ripatti
Abstract: This paper extends Gertler’s (1999) tractable overlapping
generations model with life-cycle features by allowing for distortionary
taxation, demographic transition and stochastic variation in demographic
structure. The model is then used to study demographic change in the small
open economy of Finland. Simulations highlight the key role played by
labour market responses to ageing. When the responses of labour supply,
wages, and hence private consumption, to higher taxation are consistently
accounted for, population ageing has clearly much larger effects on public
finance, when compared to mechanical sustainability calculations.
Stochastic simulations suggest that lengthening of working time has only a
modest alleviating effect on the fiscal burden of ageing. This is due to
the fact that stochastic variation in the length of working time has only a
relatively small effect on the model’s dependency ratio. Variation in life
expectancy is clearly much more important.
Keywords: ageing; general equilibrium; public finance; demographic uncertainty; (follow links to similar papers)
JEL-Codes: E13; H55; J11; J26; (follow links to similar papers)
45 pages, December 23, 2006
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