The Young, the Old, and the Government: Demographics and Fiscal Multipliers

91 Pages Posted: 7 Nov 2018

Date Written: November 7, 2018

Abstract

We document that fiscal multipliers depend on the age structure of the population. Using the variation in military spending and birth rates across U.S. states, we show that local fiscal multipliers increase with the share of young people in total population. We rationalize this fact with a parsimonious life-cycle open-economy New Keynesian model with credit market imperfections. The model explains 65% of the relationship between local fiscal multipliers and demographics. We use the model to study the implications of population aging, and find that nowadays U.S. national fiscal multipliers are 36% lower than in 1980.

Keywords: life-cycle, population aging, fiscal policy

JEL Classification: E30, E62, J11

Suggested Citation

Basso, Henrique S. and Rachedi, Omar, The Young, the Old, and the Government: Demographics and Fiscal Multipliers (November 7, 2018). Banco de Espana Working Paper No. 1837, Available at SSRN: https://ssrn.com/abstract=3280178 or http://dx.doi.org/10.2139/ssrn.3280178

Henrique S. Basso (Contact Author)

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Omar Rachedi

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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