IDEAS home Printed from https://ideas.repec.org/p/rif/dpaper/1265.html
   My bibliography  Save this paper

Fiscal sustainability and policy rules under changing demographic forecasts

Author

Listed:
  • Lassila, Jukka
  • Valkonen, Tarmo
  • Alho, Juha M.

Abstract

All practical evaluations of fiscal sustainability that include the effects of population ageing must utilize demographic forecasts. It is well known that such forecasts are uncertain, and that has been taken into account in some studies by using stochastic population projections jointly with economic models. We develop this approach further by introducing regular demographic forecast revisions that are embedded in stochastic population projections. This allows us to separate systematically, in each demographic outcome and under different policy rules, the expected and the actualized effects of population ageing on public finances. We show that the likelihood of sustainability risks is significant, and that it would be wise to consider policies that reduce the likelihood of getting highly indebted. Furthermore, although demographic forecasts are uncertain, they seem to contain enough information to be useful in forward-looking policy rules.

Suggested Citation

  • Lassila, Jukka & Valkonen, Tarmo & Alho, Juha M., 2011. "Fiscal sustainability and policy rules under changing demographic forecasts," Discussion Papers 1265, The Research Institute of the Finnish Economy.
    • Handle: RePEc:rif:dpaper:1265
    as

    Download full text from publisher

    File URL: http://www.etla.fi/wp-content/uploads/2012/09/dp1265.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Alho, Juha M. & Hougaard Jensen, Svend E. & Lassila, Jukka & Valkonen, Tarmo, 2005. "Controlling the effects of demographic risks: the role of pension indexation schemes," Journal of Pension Economics and Finance, Cambridge University Press, vol. 4(2), pages 139-153, July.
    2. Alan J. Auerbach & Ronald Lee, 2009. "Notional Defined Contribution Pension Systems in a Stochastic Context: Design and Stability," NBER Chapters, in: Social Security Policy in a Changing Environment, pages 43-68, National Bureau of Economic Research, Inc.
    3. Eric M. Leeper, 2010. "Monetary science, fiscal alchemy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 361-434.
    4. Ronald D. Lee & Michael W. Anderson & Shripad Tuljapurkar, 2003. "Stochastic Forecasts of the Social Security Trust Fund," Working Papers wp043, University of Michigan, Michigan Retirement Research Center.
    5. Jukka Lassila & Tarmo Valkonen, 2004. "Pre-funding Expenditure on Health and Long-term Care under Demographic Uncertainty," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 29(4), pages 620-639, October.
    6. Enrique G. Mendoza & P. Marcelo Oviedo, 2009. "Public Debt, Fiscal Solvency and Macroeconomic Uncertainty in Latin America The Cases of Brazil, Colombia, Costa Rica and Mexico," Economía Mexicana NUEVA ÉPOCA, CIDE, División de Economía, vol. 0(2), pages 133-173, July-Dece.
    7. Jukka Lassila & Tarmo Valkonen, 2007. "The Finnish Pension Reform of 2005," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 32(1), pages 75-94, January.
    8. Carmen M. Reinhart & Kenneth S. Rogoff, 2010. "Growth in a Time of Debt," American Economic Review, American Economic Association, vol. 100(2), pages 573-578, May.
    9. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-247, April.
    10. Nico Keilman, 2008. "European Demographic Forecasts Have Not Become More Accurate Over the Past 25 Years," Population and Development Review, The Population Council, Inc., vol. 34(1), pages 137-153, March.
    11. Lee, Ronald & Tuljapurkar, Shripad, 1998. "Uncertain Demographic Futures and Social Security Finances," American Economic Review, American Economic Association, vol. 88(2), pages 237-241, May.
    12. John Creedy & Grant M Scobie, 2002. "Population Ageing and Social Expenditure in New Zealand: Stochastic Projections," Treasury Working Paper Series 02/28, New Zealand Treasury.
    13. Dr Martin Weale, 2005. "Fiscal implications of demographic uncertainty for the UK," National Institute of Economic and Social Research (NIESR) Discussion Papers 250, National Institute of Economic and Social Research.
    14. Auerbach,Alan J. & Lee,Ronald D. (ed.), 2001. "Demographic Change and Fiscal Policy," Cambridge Books, Cambridge University Press, number 9780521662444, September.
    15. Jukka Lassila & Tarmo Valkonen & Juha M. Alho, 2011. "Assessing the sustainability of health and long-term care financing - and the usefulness of policy guidelines based on demographic forecasts," Chapters, in: Three takes sustainability. VATT Publications 58, pages 151-175, The Research Institute of the Finnish Economy.
    16. Pål Ulla, 2006. "Assessing Fiscal Risks through Long-term Budget Projections," OECD Journal on Budgeting, OECD Publishing, vol. 6(1), pages 127-187.
    17. Alho, Juha M. & Vanne, Reijo, 2006. "On predictive distributions of public net liabilities," International Journal of Forecasting, Elsevier, vol. 22(4), pages 725-733.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Amélie Lecocq & Marcelin Joanis, 2013. "Au-delà des certitudes : Pouvoir gris, obésité et autres dimensions incertaines de l’impact budgétaire du vieillissement," Cahiers de recherche 13-08, Departement d'économique de l'École de gestion à l'Université de Sherbrooke.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lassila, Jukka & Valkonen, Tarmo & Alho, Juha M., 2014. "Demographic forecasts and fiscal policy rules," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1098-1109.
    2. repec:zbw:bofrdp:2008_028 is not listed on IDEAS
    3. Jukka Lassila & Tarmo Valkonen, 2018. "Longevity, Working Lives, And Public Finances," Contemporary Economic Policy, Western Economic Association International, vol. 36(3), pages 467-482, July.
    4. Lassila, Jukka & Valkonen, Timo, 2008. "Population ageing and fiscal sustainability in Finland : a stochastic analysis," Research Discussion Papers 28/2008, Bank of Finland.
    5. Lassila, Jukka & Valkonen, Timo, 2008. "Population ageing and fiscal sustainability in Finland: a stochastic analysis," Bank of Finland Research Discussion Papers 28/2008, Bank of Finland.
    6. Lassila, Jukka, 2018. "Aggregate Risks, Intergenerational Risk-Sharing and Fiscal Sustainability in the Finnish Earnings-Related Pension System," ETLA Working Papers 57, The Research Institute of the Finnish Economy.
    7. Honkatukia, Juha, 2011. "Three takes on sustainability," Research Reports P58, VATT Institute for Economic Research.
    8. César Fernando Reis & Jelson Serafim, 2018. "Growth and Debt in Angola at Provincial Level," CEsA Working Papers 172, CEsA - Center for African and Development Studies.
    9. Alan J. Auerbach & Ronald Lee, 2009. "Notional Defined Contribution Pension Systems in a Stochastic Context: Design and Stability," NBER Chapters, in: Social Security Policy in a Changing Environment, pages 43-68, National Bureau of Economic Research, Inc.
    10. Panizza, Ugo & Fatás, Antonio & Ghosh, Atish R. & ,, 2019. "The Motives to Borrow," CEPR Discussion Papers 13735, C.E.P.R. Discussion Papers.
    11. Nicolas Clootens & Francesco Magris, 2024. "Nonrenewable resource use sustainability and public debt," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 26(1), February.
    12. Helder Ferreira de Mendonça & Vítor Ribeiro Laufer Calafate, 2021. "Lack of fiscal transparency and economic growth expectations: an empirical assessment from a large emerging economy," Empirical Economics, Springer, vol. 61(6), pages 2985-3027, December.
    13. Bitar, Nicholas & Chakrabarti, Avik & Zeaiter, Hussein, 2018. "Were Reinhart and Rogoff right?," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 614-620.
    14. Ondra Kamenik & Zdenek Tuma & David Vavra & Zuzana Smidova, 2013. "A Simple Fiscal Stress Testing Model: Case Studies of Austrian, Czech and German Economies," OECD Economics Department Working Papers 1074, OECD Publishing.
    15. Robert A Buckle & Amy A Cruickshank, 2013. "The Requirements for Long-Run Fiscal Sustainability," Treasury Working Paper Series 13/20, New Zealand Treasury.
    16. Bielecki, Marcin & Goraus, Karolina & Hagemejer, Jan & Makarski, Krzysztof & Tyrowicz, Joanna, 2015. "Small assumptions (can) have a large bearing: evaluating pension system reforms with OLG models," Economic Modelling, Elsevier, vol. 48(C), pages 210-221.
    17. Auerbach, Alan J. & Lee, Ronald, 2011. "Welfare and generational equity in sustainable unfunded pension systems," Journal of Public Economics, Elsevier, vol. 95(1), pages 16-27.
    18. Samir Soneji & Gary King, 2012. "Statistical Security for Social Security," Demography, Springer;Population Association of America (PAA), vol. 49(3), pages 1037-1060, August.
    19. Leo Kaas, 2016. "Public debt and total factor productivity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(2), pages 309-333, February.
    20. Sin-Yu Ho & Bernard Njindan Iyke, 2020. "The Determinants of Economic Growth in Ghana: New Empirical Evidence," Global Business Review, International Management Institute, vol. 21(3), pages 626-644, June.
    21. Fehr, Hans & Habermann, Christian, 2006. "Pension reform and demographic uncertainty: the case of Germany," Journal of Pension Economics and Finance, Cambridge University Press, vol. 5(1), pages 69-90, March.

    More about this item

    Keywords

    public finance; fiscal sustainability; stochastic population simulations; changing demographic forecasts;
    All these keywords.

    JEL classification:

    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • 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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rif:dpaper:1265. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kaija Hyvönen-Rajecki (email available below). General contact details of provider: https://edirc.repec.org/data/etlaafi.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.