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Sustainable fiscal strategies under changing demographics

Author

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  • Hughes Hallett, Andrew
  • Hougaard Jensen, Svend E.
  • Sveinsson, Thorsteinn Sigurdur
  • Vieira, Filipe

Abstract

This paper develops an overlapping generations model to evaluate, first, the steady state growth-maximizing level of public debt around which an economy needs to stabilise; second, how the optimal level of public debt varies as a function of key population parameters; third, how fiscal rules designed to stabilise the economy around that debt level need to vary with the population parameters; and, fourth, how well the model performs as a reasonable and plausible representation of the advanced economies that face fiscal strain and deteriorating demographics. The main conclusion is: despite diminished fiscal space and flexibility due to deteriorating population parameters, a relatively benign steady state is feasible and available under mild fiscal restraints. The bigger problem will be how to get there without financial or fiscal breakdowns along the way. We offer some political economy perspectives on how best to manage that risk.

Suggested Citation

  • Hughes Hallett, Andrew & Hougaard Jensen, Svend E. & Sveinsson, Thorsteinn Sigurdur & Vieira, Filipe, 2019. "Sustainable fiscal strategies under changing demographics," European Journal of Political Economy, Elsevier, vol. 57(C), pages 34-52.
    • Handle: RePEc:eee:poleco:v:57:y:2019:i:c:p:34-52
    DOI: 10.1016/j.ejpoleco.2018.07.003
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    Cited by:

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    2. María del Carmen Ramos-Herrera & Simón Sosvilla-Rivero, 2020. "Fiscal Sustainability in Aging Societies: Evidence from Euro Area Countries," Sustainability, MDPI, vol. 12(24), pages 1-20, December.
    3. Svend E. Hougaard Jensen & Thorsteinn Sigurdur Sveinsson & Filipe Bonito Vieira, 2021. "From Here to There: Achieving Fiscal Sustainability Under Alternative Demographic Contingencies," De Economist, Springer, vol. 169(4), pages 427-444, November.

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    More about this item

    Keywords

    Fiscal rules; Public debt; Economic growth; Demographic changes; E62; H63; J11;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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