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Demographic Uncertainty and Labour Market Imperfections in Small Open Economy

Author

Listed:
  • Juha Kilponen

    (Bank of Finland)

  • Helvi Kinnunen

    (Bank of Finland)

  • Antti Ripatti

    (Bank of Finland)

Abstract

This paper extends Gertler's (1999) tractable overlapping generations model by allowing for imperfect labour markets and distortionary taxation. Furthermore, we allow for stochastic variation in demographic structure. The model is then used to study demographic change in a small open economy of Finland. The simulations highlight a key role played by labour market imperfections in determining a fiscal burden of ageing in defined benefit pensions systems. Higher labour market imperfections lead into considerably stronger responses of labour supply and taxes on ageing. Thus, imperfections magnify the problem associated with fiscal sustainability in ageing society. Higher labour market imperfections lead into considerably stronger responses of labour supply and taxes on ageing. Thus, imperfections magnify the problem associated with fiscal sustainability in ageing society. Stochastic simulations suggest that lengthening of working time has rather minor impact on alleviating the fiscal burden of ageing. Only a small fraction of the stochastic variation in endogenously determined contribution rate is explained by the stochastic variation in the lenght of working time. Variation in fertility rate is clearly more important.

Suggested Citation

  • Juha Kilponen & Helvi Kinnunen & Antti Ripatti, 2006. "Demographic Uncertainty and Labour Market Imperfections in Small Open Economy," Computing in Economics and Finance 2006 227, Society for Computational Economics.
    • Handle: RePEc:sce:scecfa:227
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    File URL: http://repec.org/sce2006/up.22712.1140782609.pdf
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    References listed on IDEAS

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    Cited by:

    1. Vanda Almeida & Gabriela Castro & Ricardo Félix, 2010. "Improving competition in the non-tradable goods and labour markets: the Portuguese case," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 9(3), pages 163-193, December.
    2. Fujiwara, Ippei & Teranishi, Yuki, 2008. "A dynamic new Keynesian life-cycle model: Societal aging, demographics, and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2398-2427, August.
    3. Ripatti, Antti, 2008. "'A dynamic new Keynesian life-cycle model: Societal aging, demographics, and monetary policy' by Ippei Fujiwara and Yuki Teranishi. A comment," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2507-2511, August.

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    More about this item

    Keywords

    Demographics; Uncertainty; DSGE; Labour Markets;
    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
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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