HIAS GLECS

HIAS-E-100

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
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