Modelling the Impact of Demographic Change Upon the Economy

Abstract

It is well known that over the next few decades there will be significant changes in the demographic structures of nearly all developed countries; in the absence of massive immigration, or of catastrophic new fatal illnesses, by the middle of the next century the ratio of people of working age to those of retirement age will, in many countries, be only around one-half the current level. Such dramatic demographic change could have a powerful impact upon saving behavior in both the public and private sectors and upon asset prices and wages. But estimates of how great the effects will be differ substantially depending on what kind of evidence is used. This paper argues that simulations based on calibrated general equilibrium models are likely to provide the most reliable evidence. A model is developed and used to assess how aging will affect the United Kingdom and the rest of Europe. How governments respond to shifts in saving and in the burden of state pensions is important, and the model is used to assess various public policy options.

JEL Classification: D58, D91, E21, J11