Fiscal multipliers in the most aged country: Empirical evidence and theoretical interpretation

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.

Hitotsubashi Institute for Advanced Study, Hitotsubashi University

2020-09

English(eng)

technical report

VoR

44

This research was funded by Grant-in-Aid for Young Scientists 19K13652 and the Nomura Foundation.

Discussion paper series / Hitotsubashi Institute for Advanced Study, Hitotsubashi University

https://hdl.handle.net/10086/31357