Endogenous Fiscal Policy and Capital Market Transmissions in the Presence of Demographic Shocks

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 13.07.2006, 12:15 - 13:30


Presentation by 

Mehmet S. Tosun (University of Nevada, Reno)


Previous analyses of population aging mainly focused on the social security implications of the aging trend. This paper addresses aging in an open economy framework with two regions that have politically responsive fiscal policy regarding their education finance. The paper shows that capital flows from the aging region to the late-aging region, alleviating the negative growth and welfare effects of this regionís demographic shift. While demographic shocks start a growth process that lead to income and consumption improvements in both regions, these results are sensitive to a critical parameter in the model that indicates the return to education spending. Low values of this parameter are associated with less favorable economic outcomes particularly in education spending and human capital. Hence, a policy implication emerges that investing in education system enhancement might pay off in terms of easing the negative growth and welfare consequences of expected demographic shocks. The paper also shows empirical evidence on the negative relationship between population aging and government spending on education based on panel data on 61 countries for the years 1965 through 1995.

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