Will China Eat Our Lunch or Take Us Out to Dinner? Simulating the Transition Paths of the U.S., EU, Japan, and China

71 Pages Posted: 30 Nov 2005 Last revised: 27 Jul 2009

See all articles by Hans Fehr

Hans Fehr

University of Würzburg - Institute of Economics and Social Sciences

Sabine Jokisch

Ulm University - Institute of Economics

Laurence J. Kotlikoff

Boston University - Department of Economics; National Bureau of Economic Research (NBER); Gaidar Institute for Economic Policy

Date Written: October 2005

Abstract

This paper develops a dynamic, life-cycle, general equilibrium model to study the interdependent demographic, fiscal, and economic transition paths of China, Japan, the U.S., and the EU. Each of these countries/regions is entering a period of rapid and significant aging requiring major fiscal adjustments.In previous studies that excluded China we predicted that tax hikes needed to pay benefits along the developed world's demographic transition would lead to capital shortage, reducing real wages per unit of human capital. Adding China to the model dramatically alters this prediction. Even though China is aging rapidly, its saving behavior, growth rate, and fiscal policies are very different from those of developed countries. If this continues to be the case, the model's long run looks much brighter.China eventually becomes the world's saver and, thereby, the developed world's savoir with respect to its long-run supply of capital and long-run general equilibrium prospects. And, rather than seeing the real wage per unit of human capital fall, the West and Japan see it rise by one fifth by 2030 and by three fifths by 2100. These wage increases are over and above those associated with technical progress.

Suggested Citation

Fehr, Hans and Jokisch, Sabine and Kotlikoff, Laurence J., Will China Eat Our Lunch or Take Us Out to Dinner? Simulating the Transition Paths of the U.S., EU, Japan, and China (October 2005). NBER Working Paper No. w11668. Available at SSRN: https://ssrn.com/abstract=819829

Hans Fehr

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
D-97070 Wuerzburg
Germany
0931- 31 29 72 (Phone)
0931- 888 71 29 (Fax)

Sabine Jokisch

Ulm University - Institute of Economics ( email )

Helmholtzstrasse 18
D-89081 Ulm
Germany

Laurence J. Kotlikoff (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-4002 (Phone)
617-353-4449 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gaidar Institute for Economic Policy

Gazetny per. 5-3
Moscow, 125993
Russia

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