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Trade-Off Effect of Pay-As-You-Go Public Pension on Economic and Welfare Volatility

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  • Insook Lee

    (Peking University HSBC Business School)

Abstract

Using an overlapping-generations model where heterogeneous individuals choose their own consumption and labor supply for responding to total factor productivity shocks, this paper finds a trade-off effect of pay-as-you-go public pension on macroeconomic stability and welfare volatility. This paper theoretically proves that pay-as-you-go public pension can reduce volatilities of total consumption and social welfare at the cost of increasing volatilities of aggregate output, labor supply, and investment. By reducing the exposure of retirement wealth to aggregate shocks, pay-as-you-go public pension can make individuals work and save less in recessions and more in booms.

Suggested Citation

  • Insook Lee, 2020. "Trade-Off Effect of Pay-As-You-Go Public Pension on Economic and Welfare Volatility," Hacienda Pública Española / Review of Public Economics, IEF, vol. 233(2), pages 117-140, June.
    • Handle: RePEc:hpe:journl:y:2020:v:233:i:2:p:117-140
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Pay-as-you-go public pension; macroeconomic stability; social welfare volatility;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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