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Effective Fiscal Policy in an Aging Economy: Evidence from a BVAR Analysis

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  • Puonti, Päivi

Abstract

As people age, their consumption and saving behavior tends to change. At the same time, the share of age-related public spending increases, leaving less resources for fiscal stimulus, especially if public debt ratio is already high. Using Finnish data in a Bayesian VAR model, we show that the composition of public spending matters for the effectiveness of fiscal stimulus in an aging economy. Our results suggest that increasing social transfers targeted mostly to the elderly boosts the economy less than increasing consumption expenditure that financially benefits the working aged population. This is due to a different saving and consumption behavior of the population group benefitting from the fiscal impulse. The results imply that in an aging economy targeting fiscal measures becomes more important than ever.

Suggested Citation

  • Puonti, Päivi, 2023. "Effective Fiscal Policy in an Aging Economy: Evidence from a BVAR Analysis," ETLA Working Papers 110, The Research Institute of the Finnish Economy.
    • Handle: RePEc:rif:wpaper:110
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    More about this item

    Keywords

    Population aging; Fiscal policy; Bayesian structural vector autoregressions;
    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
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • J10 - Labor and Demographic Economics - - Demographic Economics - - - General
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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