Optimal Response to a Demographic Shock

31 Pages Posted: 4 Feb 2005

See all articles by Juan C. Conesa

Juan C. Conesa

Universitat Pompeu Fabra

Carlos Garriga

Federal Reserve Banks - Research Division

Date Written: January 2005

Abstract

We examine the optimal policy response to an exogenously given demographic shock. Such a shock affects negatively the financing of retirement pensions, and we use optimal fiscal policy in order to determine the optimal strategy of the social security administration. Our approach provides specific policy responses in an environment that guarantees the financial sustainability of existing retirement pensions. At the same time, pensions will be financed in a way that by construction generates no welfare losses for any of the cohorts in our economy. In contrast to existing literature we endogenously determine optimal policies rather than exploring implications of exogenously given policies. Our results show that the optimal strategy is based upon the following ingredients: elimination of compulsory retirement, a change in the structure of labor income taxation and a temporary increase in the level of government debt.

JEL Classification: E6, H0

Suggested Citation

Conesa, Juan C. and Garriga, Carlos, Optimal Response to a Demographic Shock (January 2005). Available at SSRN: https://ssrn.com/abstract=655883 or http://dx.doi.org/10.2139/ssrn.655883

Juan C. Conesa (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
08005 Barcelona
Spain

Carlos Garriga

Federal Reserve Banks - Research Division ( email )

P.O. Box 442
St. Louis, MO 63166-0442
United States
(314) 444-7412 (Phone)
(314) 444-8731 (Fax)

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