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Population ageing in a small open economy: some policy experiments with a tractable general equilibrium model

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  • Kilponen, Juha
  • Kinnunen, Helvi
  • Ripatti, Antti

Abstract

This paper extends Gertler's (1999) tractable overlapping generations model with life-cycle features by allowing for distortionary taxation, demographic transition and stochastic variation in demographic structure.The model is then used to study demographic change in the small open economy of Finland. Simulations highlight the key role played by labour market responses to ageing.When the responses of labour supply, wages, and hence private consumption, to higher taxation are consistently accounted for, population ageing has clearly much larger effects on public finance, when compared to mechanical sustainability calculations.Stochastic simulations suggest that lengthening of working time has only a modest alleviating effect on the fiscal burden of ageing.This is due to the fact that stochastic variation in the length of working time has only a relatively small effect on the model's dependency ratio.Variation in life expectancy is clearly much more important.

Suggested Citation

  • Kilponen, Juha & Kinnunen, Helvi & Ripatti, Antti, 2006. "Population ageing in a small open economy: some policy experiments with a tractable general equilibrium model," Bank of Finland Research Discussion Papers 28/2006, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2006_028
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    Cited by:

    1. Kinnunen, Helvi, 2008. "Government funds and demographic transition: alleviating ageing costs in a small open economy," Bank of Finland Research Discussion Papers 21/2008, Bank of Finland.

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    More about this item

    Keywords

    ageing; general equilibrium; public finance; demographic uncertainty;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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