yoshino@econ.keio.ac.jp1

The purpose of this paper is to study how an aging population will affect economic
performance by use of a New Keynesian dynamic stochastic general equilibrium modelwith heterogeneous households. The paper introduces two generation model by assuming
gradual changes in aging population by use of continuous changes of the demography. It
will be shown that a decline in working population will reduce aggregate output,

consumption, and investment by reducing total labor supply in the long run. This paper
finds that the effectiveness of monetary policy diminishes when the working population
declines. This is the reason why Japanese economy had been suffering despite aggressive
monetary policy in these years. East Asian countries are following to Japan fortheir aging
population and Thailand will face with aging population. The study in this paper has tobe taken into account for their monetary policy in future.
2

The analysis shows that monetary policy will not solve aging problems. Structural policy
will be needed in aging society.
The model will show the following policy
recommendations. (1) postpone retirement age and ask people to work as long as possible.
(2) Wage rate must be based on productivity rather than following to seniority based wagerate. These two recommendations will increase labor force and reduce the burden ofsocial
security expanses (Yoshino and Miyamoto (2017, 2020) ). If these policies are taken,
budget deficits will decline and fiscal sustainability could be achieved even if theeconomy will face with aging population. The dynamic stochastic general equilibrium
model will show that these two recommendations were adopted, the growth rate of theeconomy will be recovered and the budget deficits will be reduced.Postpone of retirement
age together with productivity-based wage rate will encourage technological progress for
elderly workers so that they can maintain their productivity in both manufacturing andservices industries which will push aggregate supply curve to shift to the right. Robo ts
can assist in many sectors so that elderly workers can keep their employment which will
reduce budget deficits and lower tax burdens of younger generation.
3Source:
Yoshino and Miyamoto“Population Aging: Need
For Structural ReformOf the Japanese
EmploymentSystem”

Japan Spotlight
Sept./Oct. issue, 2020.
PP. 52-54.

4

Population Aging of Japan
10 of Thousands

CurrentFigures

Forecast(2012)

Peak of the Population
2004, 127.8 million
70.0

14,000Age 65 and12,00060.0

over

10,00050.0

Age 15～64

8,000

40.0
Age 14 and

2060

2050

2040

2030

2020

0.0

2010

0

2000

10.0

1990

2,000

1980

20.0

1970

4,000

1960

30.0

1950

6,000

FY

lessAged
Population
Ratio

Source：Ministry of Internal
Affairs and Communication
5

Budget deficit has been
expanded…

Source: Ministry of Finance of Japan…due to a huge increase of social
security due to population aging

Source: Yoshino and Miyamoto (2017)c_(r,t)=s+R_t“Declined effectiveness(W_r ) ̅, of fiscal and monetary policies facedwith aging population in Japan” Japan and the World Economy, Vol.42, PP.32-44.

Retirees

Aggregate Consumption

8

9

10

Effects of Expansional Monetary Policy
Monetary Policy (Working Population)→ Increase investment→ Wages of working population will rise
→ Consumption of working population will rise(Retired Population)→ relies on pensions and social welfare→ monetary policy does not affect to retirees
11Effects of Fiscal Policy (Public Works)
Fiscal Policy (Working Population)→ Create new jobs
→ Unemployment rate declines→ Consumption of working population will rise
Retired population→ Not affected by fiscal policy (punli→ consumption remains the same
→ lower interest rate reduces their interest income
12Empirics – Miyamoto and Yoshino (2020)• Specification 1••••

𝑘𝑦𝑖,𝑡+𝑘 − 𝑦𝑖,𝑡 = 𝛼𝑖𝑘 + 𝛾𝑡𝑘 + 𝛽 𝑘 𝑠ℎ𝑜𝑐𝑘𝑖,𝑡 + 𝜀𝑖,𝑡𝒚 : log of output (debt-to-GDP ratio, private-investment-output ratio)
𝒔𝒉𝒐𝒄𝒌 : an unanticipated public investment shock
𝜶 : country fixed effects
𝜸 : time fixed effects• Specification 2𝑦𝑖,𝑡+𝑘 − 𝑦𝑖,𝑡 = 𝛼𝑖𝑘 + 𝛾𝑡𝑘 + 𝛽1𝑘 𝐺 𝑧𝑖,𝑡 𝑠ℎ𝑜𝑐𝑘𝑖,𝑡 + 𝛽2𝑘 1 − 𝐺 𝑧𝑖,𝑡with

𝐺 𝑧𝑖,𝑡exp(−𝛿𝑧𝑖𝑡 )=,𝛿 > 01 + exp(−𝛿𝑧𝑖𝑡 )where 𝜹 is an indicator of public investment efficiency

𝑠ℎ𝑜𝑐𝑘𝑖,𝑡Impact of Fiscal Policy Declines
as Population ages
Non-aging economy

Aging economy

32

2.5
1.5
2
1
1.5
0.5
100.5-10-1-0.5

012340123-0.5-1

Source: Yoshino and Miyamoto, “Population Aging: Need For Structural Reform Of the Japanese
Employment System” Japan Spotlight, Sept./Oct. issue, 2020. PP. 52-54.

4

Recommended
Policy:Productivity
based wage rate andpostpone retirementage
Yoshino-Miyamoto(2017) Japan and the World
EconomyYoshino-Farhad-Miyamoto(2017) Credit and CapitalMarkets

Self Preparation:
Increase of Private Savings

16

Yoshino-Mizoguchi-Hesary (2019)

Source: Ministry of Finance, Japan21

Domar Condition of Fiscal Stability
The Domar condition is often used to judge whether the budget deficit is sustainable. The
Domar condition is obtained from the government budget constraint:

where G_{t} is government spending, B_{t} is the stock of public debt, T_{t} is total tax
revenues, and r_{t} is the interest rate for public debt. By dividing (1) by GDP Y_{t}, we
can obtain

Interest Rate (rt) > growth rate of the economy(η) → Unstable
Interest Rate (rt)< growth rate of the economy(η) → Stable
Source: forthcoming, Global Solutions Journal, December 2020

Revival of Domar Condition
by Paul Krugman and Tirore
1.

Domar, E.D. (1944), “The Burden of Debt and the National Income”, American
Economic Review, 34(4), pp. 798-827.

2.

Krugman, P. (2020), “The case forpermanent stimulus”, Mitigating the COVID

Economic Crisis: Act Fast and Do Whatever It Takes, Edited by Richard Baldwin andBeatrice Weder di Mauro, A CEPR Press VoxEU.org eBook.

Domar condition is obtained only by the supply side ofgovernment bonds and does not take into account ofdemand for government bonds.
US government bonds are purchased by all over the world.

Yoshino-Mizoguchi-Hesary (2019)By substituting (6) into (5), we have

RevisedDomarCondition

Then, (10) can be rewritten as

Revised Fiscal Stability Condition

3104

Comparison between Greece and Japan

Forthcoming ADBI Discussion paper (2020)
Revisit Public Debt Stability Condition: Rethinking of the Domar Condition
Naoyuki Yoshino, Keio University
Hiroaki Miyamoto, Tokyo Metropolitan UniversityReferences
Yoshino, Naoyuki 2020, Inducing private finance to water supply and inland water transport using
spillover tax revenues, Innovation for water infrastructure development in the Mekong Region., OECD,Yoshino, Naoyuki, Mozur Hossain, and Farhad Taghizadeh-Hesary, 2020. Enhancing Financial Connectivity
Between Asia and Europe: Implications for Infrastructure convergence Between the Two Regions, Asian

Economic Papers, Vol.19,No.2, MIT Press.
Yoshino, Naoyuki and Hiroaki Miyamoto, 2020. Revisiting the Public Debt Stability Condition: Rethinking theDomar Condition, ADBI working Paper, 1141. May. Asian Development Bank Institute.

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