Comparative Analysis of Fiscal
Policies in an aging economy
N. Yoshino, K. Kameda, H. Miyamoto, Z. Lu
June 2024

Aging populations challenge policymakers worldwide
50

Share of 65 and over(%)

45
40
35
30
25
20
15
10
50

1950

1960

1970

Japan

1980

1990

China

EU

2000
India

2010

2020
Korea

2030

2040

UK

US

2050

2060

2070

World

Source: UN• Both advanced and emerging economies are experiencing aging.
• Japan is the most aged country globally.

Aging increases social security costs, straining publicfinances
General government debt (% of GDP)

General Accounts Expenditure300

140120Social security-related expenses havesignificantly increased

250(Trillion yen)

100
200
80
15060
40100

205001960

1970

1980

1990

2000

Social Sesurity

Local Allocation Tax GrantsOthers

National Debt Service2010

2023

Public Works

Source: MoF

0

CanadaSource: IMF• Ensuring fiscal sustainability is crucial.
• Examining fiscal policy effects is essential.

FranceGermanyItaly

Japan

UK

US

AEs

Motivation• Recent studies analyze the impact of aging on fiscal policy effectiveness.
• Honda and Miyamoto (2021), Basso and Rachedi (2021), Miyamoto and Yoshino (2022)• These studies focus on government consumption but lack in-depth analysis
of fiscal expenditure composition.
• They do not clarify the mechanisms through which aging affects fiscal policy.

Purpose• Use a DSGE model to analyze the impact of aging on four types of fiscalpolicies:
1.
2.
3.
4.

Government consumption to stimulate aggregate demand
Universal transfer to all households
Public investment in infrastructure
R&D expenditure to foster technological progress• DSGE model with heterogenous agents• Young (workers) and old (retirees)Main Results• Output effects of government consumption, investment, andR&D expenditure shocks decrease with aging.
• R&D expenditure shock is the most effective regardless of aging.
• Public investment shock ranks second in the long run;government consumption shock is second in the short run.

Model Overview
Central Bank(Taylor rule)

R&D 𝑹𝑫𝒕

TFP
Public investment 𝒊𝒈,𝒕Household

Government

Gov. consumption:𝒈𝒕
Transfer 𝑻𝑹𝒕

Workers(dynamicoptimal)

Retirees(hand tomouth)

Capital, Labor
rental fee, wage

Intermediatefirms(MonopolisticCompetition; Calvopricing)

Intermediate goods 𝑦𝑗,𝑡Final goodproducer(Competitive)

Final Good 𝑌𝑡7

Model• Two agents: workers (𝜙) who maximize utility, and retirees (1-𝜙)who consume hand-to-mouth.
• Worker’s problem: optimize consumption and labor supply• Retiree’s problem: consume given income
𝑐𝑟,𝑡 = 𝑠 ∗ 𝑤
ഥ + 𝑇𝑅𝑟,𝑡Model• Intermediate firms produce goods• R&D expenditure affects TFP• 𝐴𝑡 :TFP, 𝑅𝐷𝑡 :R&D expenditures, 𝑌𝑡 :GDP

Fiscal Authorities• The accumulation of public capital• Public investment 𝑖𝑔,𝑡 follows• Government consumption 𝑔𝑡 follows• The one-time transfer follows

Calibration• Parameters calibrated to the Japanese economy.
• Model period: one quarter.
• Fiscal policy shock: 0.01% of GDP.

Impact of Gov. Consumption Shock• Future tax burden for workers:• Negative wealth effect• LS ↑, Output ↑, Real wages ↓• GC complements PC:• Worker consumption ↑• Retiree consumption
unchanged:• 𝑐=𝜙𝑐𝑤↑+(1−𝜙)𝑐𝑟• Total demand > Total supply:• Inflation ↑• Taylor rule: interest rate ↑• Market clearing condition:• 𝑖=𝑌−𝑐↑−𝑔↑−𝑅𝐷• Investment ↓Impact of Gov. Consumption Shock• Future tax burden for workers:• Negative wealth effect• LS ↑, Output ↑, Real wages ↓• GC complements PC:• Worker consumption ↑• Retiree consumption
unchanged:• 𝑐=𝜙𝑐𝑤↑+(1−𝜙)𝑐𝑟• Total demand > Total supply:• Inflation ↑• Taylor rule: interest rate ↑• Market clearing condition:• 𝑖=𝑌−𝑐↑−𝑔↑−𝑅𝐷• Investment ↓Impact of Gov. Consumption Shock• Future tax burden for workers:• Negative wealth effect• LS ↑, Output ↑, Real wages ↓• GC complements PC:• Worker consumption ↑• Retiree consumption
unchanged:• 𝑐=𝜙𝑐𝑤↑+(1−𝜙)𝑐𝑟• Total demand > Total supply:• Inflation ↑• Taylor rule: interest rate ↑• Market clearing condition:• 𝑖=𝑌−𝑐↑−𝑔↑−𝑅𝐷• Investment ↓Impact of Gov. Consumption Shock• Future tax burden for workers:• Negative wealth effect• LS ↑, Output ↑, Real wages ↓• GC complements PC:• Worker consumption ↑• Retiree consumption
unchanged:• 𝑐=𝜙𝑐𝑤↑+(1−𝜙)𝑐𝑟• Total demand > Total supply:• Inflation ↑• Taylor rule: interest rate ↑• Market clearing condition:• 𝑖=𝑌−𝑐↑−𝑔↑−𝑅𝐷• Investment ↓Effects of Universal Transfer Increase• Retirees consume allsubsidies:• Retiree consumption ↑↑• Worker tax burden increases:• Negative wealth effect• Worker consumption ↓, Laborsupply ↑, Output ↑• 𝑐=𝜙𝑐𝑤↓+(1−𝜙)𝑐𝑟↑↑• Total consumption ↑• Total demand > Total supply:• Inflation ↑• CB Taylor rule:• Nominal & Real interest rate ↑• Market clearing condition:• Investment ↓Effect of Public Investment Shock• Public capital accumulation:• Output ↑, LP ↑, Wages ↑• SR: Negative wealth effect:• LR: Positive wealth effect• Labor supply ↑ ⇒ ↓• Worker consumption ↓ ⇒ ↑• Retiree consumption unchanged:• Total consumption ↓ ⇒ ↑• SR: Demand > Supply:• LR: Demand < Supply• Inflation ↑ ⇒ ↓Effects of R&D Expenditure Shock• Significant TFP increase:• Output ↑, Productivity ↑,Wages ↑• Positive wealth effect:• Labor supply ↓• Worker consumption ↑• Retiree consumption
unchanged:• Total consumption ↑• Supply > Demand:• Inflation ↓Fiscal Multiplier• Following Mountford and Uhlig (2009), compute the present
value output multiplier.

• Δ𝑋𝑗 ∣ 𝜙：Deviation of X from its steady state value with respect to ϕComparison of Fiscal Multipliers
AgingConclusion• Short-term demand-stimulating measures (government consumption anduniversal transfers) boost GDP. Supply-side policies (R&D expenditure andpublic investment) support medium- to long-term growth.
• Aging reduces fiscal policy effectiveness due to:• Lower labor supply• Reduced consumption stimulus• Structural reforms, especially labor market reforms, are needed to enhancefiscal policy effectiveness in an aging economy.
• Secure sufficiently large fiscal room during normal times, to prepare
effective fiscal stimulus, without creating concerns for fiscal sustainability.