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An Effect of Population Aging on the Effectiveness of Fiscal Policy: Analysis using a panel VAR model

Author

Listed:
  • Hiroshi Morita

    (Associate Professor, Hosei University)

  • Hidekazu Niwa

    (PhD student, Hitotsubashi University)

Abstract

We examine how population aging changes the macroeconomic effects of fiscal policy using prefectural-level panel data in Japan. We select two groups from prefectures that are ranked in terms of the rates of population aging, and then estimate a panel VAR (vector autoregression) model for each group. In order to identify a structural shock to government spending and analyze its effects on the macroeconomy, we use sign restrictions, which are set consistently with computed impulse responses in a dynamic stochastic general equilibrium model. A key feature of this theoretical model is that it takes into consideration the presence of retirees in order to capture changes in demographics due to population aging. The estimation results indicate that aging leads to a decline in the effectiveness of spending. Moreover, we find that a way employee compensation responses also varies with aging. This implies that some effects of aging on labor markets may have contributed to the decline in the effectiveness of spending.

Suggested Citation

  • Hiroshi Morita & Hidekazu Niwa, 2021. "An Effect of Population Aging on the Effectiveness of Fiscal Policy: Analysis using a panel VAR model," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 17(3), pages 1-20, November.
    • Handle: RePEc:mof:journl:ppr17_03_02
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    population aging; fiscal multiplier; dynamic general equilibrium model; panel VAR model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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