Would Population Aging Change the Output Effects of Fiscal Policy?

IMF Working Papers, June 12, 2020

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Canonical URL: Would Population Aging Change the Output Effects of Fiscal Policy?

Authors: Jiro Honda, Hiroaki Miyamoto
Publication date: June 12, 2020
Research question: Would population aging affect the effectiveness of fiscal stimulus?
Scope: Empirical analysis for OECD countries
Subjects: Aging, Expenditure, Fiscal policy, Fiscal stimulus, Population and demographics, Public debt
Keywords: aggregate demand, Aging, aging economy, business cycle, dummy variable, Fiscal Multipliers, Fiscal Policy, fiscal policy shock, fiscal spending shock, Fiscal stimulus, Global, government spending shock, labor supply, output effect, output effects of consumption shock, output response, output-boosting effect, Population Aging, positive government spending shock, Ricardian effect, sign of government spending shock matter, WP

As population ages, the output effects of fiscal spending shocks are weakened.
High-debt countries generally face weaker fiscal multipliers.
High-debt aging economies face even weaker fiscal multipliers than high-debt non-aging economies.
Policy measures to promote labor supply could help increase the output effect of fiscal stimulus in aging economies.

Population aging would call for a larger fiscal stimulus to support aggregate demand during recession.
Aging economies therefore require larger fiscal space to allow a wider swing of the fiscal position without creating concerns for fiscal sustainability.
Complementary policies that promote labor supply can bolster the output effectiveness of fiscal stimulus in aging contexts.