Marcel Mérette

Population ageing and economic growth in seven OECD countries

Abstract It is well known that over the next several decades, there will be significant changes in the age structure of OECD populations. According to recent demographic projections by the United Nations, the share of the old-aged population is expected to double, on average, over the next 50 years in the major industrialised countries. These demographic changes may have significant fiscal and economic consequences and pose important public policy challenges for the countries involved. In this paper, we extend the Hviding and Merette (1998) [Macroeconomics Effects of Pension Reforms in the Context of Ageing: OLG Simulations for Seven OECD Countries. OECD Working Paper no. 201, Paris] computable overlapping-generation (OLG) models for seven industrialised countries in order to examine the impact of population ageing on economic growth. The model is populated by a series of 15 rational overlapping generations that optimally choose life patterns of consumption and bequest. The modified version incorporates endogenous growth, which is generated by the accumulation of both physical and human capital. Typically, a generation invests mostly in human capital when young, and in physical capital when middle-aged. Our results show that estimates of the long-run economic effects of population ageing are significantly altered when the model features endogenous growth. The results suggest that population ageing could create more opportunities for future generations to invest in human capital formation, which would stimulate economic growth and reduce significantly the apprehended negative impact of ageing on output per capita.

Demographic Changes and the Gains from Globalisation: An Analysis of Ageing, Capital Flows, and International Trade

This paper develops a multi-country overlapping-generations general equilibrium model to gauge the economic impact of demographic changes in the global economy and its transmission effects on different countries. Although severe demographic pressures contribute to significantly lower real GDP per capita across several regions in the world, globalisation through international trade generates an intertemporal gain from trade and a long-lasting improvement in the terms of trade of older OECD countries, which sustains their real consumption per capita (when goods from different geographical origins are assumed to be imperfectly substitutable), while globalisation through capital flows stimulates capital accumulation and growth in younger countries such as India and various parts of the rest of the world. The paper also illustrates that the very distinct demographic projections for China and India might, ceteris paribus, lead to striking divergences in their economic fortune.

Population Ageing and Pension System Reform in China: A Computable Overlapping-Generations General Equilibrium Model Analysis

Over the next 50 years, China will face an increase of its old-age population by approximately three times. Such a demographic change may result in a large increase of pension payments, which would require a significant rise in the pension contribution rate. This also implies important intergenerational redistribution issues and may even harm living standards as a whole. This paper analyses for China the economic impact of an ageing population by means of a computable dynamic general equilibrium model with an overlapping generations structure. The paper explores the effect on the social security system and economic development of China under alternative scenarios for the benefit rates on pensions, retirement age and technological progress. Our research indicates that a pension reform plus positive technological progress can compensate for the menace of a decline in living standards for both seniors and working generations.

Can an Ageing Scotland Afford Independence

The aim and scope of this paper is to isolate the effects of population ageing in the context of potential Scottish independence. A dynamic multiregional Overlapping Generations Computable General Equilibrium (OLG-CGE) model is used to evaluate the two scenarios. The status quo scenario assumes that Scotland stays part of the UK and all government expenditures associated with ageing population are funded on a UK-wide basis. In the independence scenario, Scotland and the rest of the UK pay for the growing demands of the ageing population independently. The comparison suggests that Scotland is worse off in the case of independence. Effective labour income tax rate in the independence scenario has to increase further compared with the status quo scenario. The additional increase reaches its maximum in 2035 at 1.4 percentage points. The additional rise in the tax rate is non-negligible, but is much smaller than the population ageing effect (status quo scenario) which generates an increase of about 8.5 percentage points by 2060. The difference for government finances between the status quo and independence scenarios is thus relatively small.

Post-Mortem of a Stabilization Plan: The Collor Plan in Brazil

Abstract In an overlapping generations equilibrium model, the macroeconomic effects of confiscation of financial assets as occurred in the Collor Plan are studied by means of numerical simulations. The model is built on many features specific to the Brazilian economy, including a financial system dominated by banks that offer indexed assets and an uneven distribution of wage income and wealth. The framework permits the analysis of the aggregate and redistributive effects of the Collor Plan in a general equilibrium context. The simulation technique developed in this article generates both stationary equilibrium paths and transitionary paths. A temporary confiscation of assets simulation replicates the outcomes of the Collor Plan and thus provides insights as to why this stabilization plan failed. This simulation result, plus those of three other simulation experiments, highlights the difficulties in subduing inflation in an indexed economy when inflation taxes are an important source of revenue for the government. These results suggest the need for fiscal reform to enlarge Brazils fiscal base and enhance its tax administration in order to win over inflation once and for all.

The long-term economic impact of reducing migration in the UK

This paper uses an OLG-CGE model for the UK to illustrate the long-term effect of migration on the economy. We use the current Conservative Party migration target to reduce net migration “from hundreds of thousands to tens of thousands†as an illustration. Achieving this target would require reducing recent net migration numbers by a factor of about 2. We undertake a simulation exercise to compare a baseline scenario, which incorporates the principal 2010-based ONS population projections, with a lower migration scenario, which assumes that net migration is reduced by around 50 per cent. The results show that such a significant reduction in net migration has strong negative effects on the economy. By 2060 the levels of both GDP and GDP per person fall by 11.0 per cent and 2.7 per cent respectively. Moreover, this policy has a significant impact on public finances. To keep the government budget balanced, the effective labour income tax rate has to be increased by 2.2 percentage points in the lower migration scenario.

The Inter-Regional Consequences of Population Ageing in Canada

Abstract A three-region, three-good, fifteen overlapping generations model is built to analyze the inter-regional consequences of population ageing in Canada. Each region of the model produces one imperfectly substitutable good. Households work the first twelve periods of their life and retire in the last three. The household’s behaviour is characterized by the life-cycle theory. The financial market is perfectly integrated. Regions differ from each other by the size of their economy, their specific local taxation and especially their demographic projections. The paper investigates the inter-regional implications arising from the asymmetric portion of the population ageing pressures.

Chapter 29 – The Inter-Regional Consequences of Population Ageing in Canada

Publisher Summary This chapter presents a three-region, three-good, fifteen overlapping generations model to analyze the inter-regional consequences of population aging in Canada. Each region of the model produces one imperfectly substitutable good. Households work the first 12 periods of their life and retire in the last three. The households behavior is characterized by the life-cycle theory and the financial market is perfectly integrated. Regions differ from each other by the size of their economy, their specific local taxation, and especially their demographic projections. The inter-regional implications arising from the asymmetric portion of the population aging pressures are investigated. When health care is added to the base case scenario, the asymmetry of the aging shock is strengthened. Health care expenditures financed by provincial governments may lead toward more economic inequality across regions. Regional governments more afflicted by aging populations are not able to transmit the fiscal pressure over the shoulders of individuals other than their own citizens.