Population Ageing in a Small Open Economy - Some Policy Experiments with a Tractable General Equilibrium Model

45 Pages Posted: 2 Oct 2007

See all articles by Juha Kilponen

Juha Kilponen

Bank of Finland - Research

Helvi Kinnunen

Bank of Finland - Research

Antti Ripatti

University of Helsinki; Bank of Finland

Date Written: 2006

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.

Keywords: ageing, general equilibrium, public finance, demographic uncertainty

JEL Classification: E13, H55, J11, J26

Suggested Citation

Kilponen, Juha and Kinnunen, Helvi and Ripatti, Antti, Population Ageing in a Small Open Economy - Some Policy Experiments with a Tractable General Equilibrium Model (2006). Bank of Finland Research Discussion Paper No. 28/2006. Available at SSRN: https://ssrn.com/abstract=1018328 or http://dx.doi.org/10.2139/ssrn.1018328

Juha Kilponen (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/kilponen_juha/

Helvi Kinnunen

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Antti Ripatti

University of Helsinki ( email )

P.O. Box 17
Helsinki, 00014
Finland
+358505203679 (Phone)

HOME PAGE: http://www.ripatti.net

Bank of Finland ( email )

Box 160
Helsinki, 00101
Finland

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