Research Discussion Papers, Bank of Finland
No 21/2008:
Government funds and demographic transition – alleviating ageing costs in a small open economy
Helvi Kinnunen ()
Abstract: This paper investigates public pension funding using a
dynamic general equilibrium macroeconomic model (DSGE) that facilitates
investigation of distortionary effects of fiscal and pension policy
responses to ageing. The model is calibrated to the Finnish economy, which
will encounter substantial ageing pressures in the near future. During the
transition to an older population structure ageing costs can be
substantially lowered by allowing public funds to smooth out the tax
responses. Cutting down on pension prefunding at a time when the pace of
ageing is at its peak reduces the necessary tax hikes and stimulates labour
supply growth at the moment when the labour market is tightest. With
smaller funding needs, ageing leads to a slower growth in labour costs, a
better employment conditions and faster production growth.
Keywords: ageing; general equilibrium; public finance; government funds; (follow links to similar papers)
JEL-Codes: E13; H55; J11; J26; (follow links to similar papers)
39 pages, September 23, 2008
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