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Fiscal Sustainability and Generational Burden Sharing in Denmark

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Abstract

Based on generational accounts and a simple welfare calculus, this paper studies two alternative scenarios of sustainable fiscal policy. A strategy of tax smoothing is found to successfully distribute the financial burden associated with population ageing across generations, but this happens at the cost of a sharp increase in public debt along the transition path. This can be avoided if a strategy of debt smoothing is followed, but this shifts the financial burden onto current generations. A comparison based on a social welfare function indicates a marginal superiority of tax smoothing.

Suggested Citation

  • Svend E. Hougaard Jensen & Ulrik Nødgaard & Lars Haagen Pedersen, 2004. "Fiscal Sustainability and Generational Burden Sharing in Denmark," DREAM Working Paper Series 200401, Danish Rational Economic Agents Model, DREAM.
    • Handle: RePEc:dra:wpaper:200401
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    File URL: http://www.dreammodel.dk/pdf/W200101.pdf
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    1. Miles, David, 1999. "Modelling the Impact of Demographic Change upon the Economy," Economic Journal, Royal Economic Society, vol. 109(452), pages 1-36, January.
    2. Raffelhuschen, Bernd & Risa, Alf Erling, 1997. "Generational Accounting and Intergenerational Welfare," Public Choice, Springer, vol. 93(1-2), pages 149-163, October.
    3. Svend Erik Hougaard Jensen & Søren Bo Nielsen, 1995. "Population ageing, public debt and sustainable fiscal policy," Fiscal Studies, Institute for Fiscal Studies, vol. 16(2), pages 1-20, May.
    4. Lars Haagen Pedersen & Peter Stephensen & Peter Trier, 1999. "A CGE Analysis of the Danish Ageing Problem," DREAM Working Paper Series 1999-02, Danish Rational Economic Agents Model, DREAM.
    5. Jensen, Svend E Hougaard & Raffelhuschen, Bernd, 1997. "Generational and Gender-Specific Aspects of the Tax and Transfer System in Denmark," Empirical Economics, Springer, vol. 22(4), pages 615-635.
    6. Martin B. Knudsen & Lars Haagen Pedersen & Toke Ward Pedersen & Peter Stephensen & Peter Trier, 1998. "Danish Rational Economic Agents Model, DREAM - Version 1.2," DREAM Working Paper Series 199804, Danish Rational Economic Agents Model, DREAM.
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    8. Hans Fehr, 2000. "Pension Reform during the Demographic Transition," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 419-443, September.
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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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