Academic journal article NBER Reporter

Kotlikoff, Fehr, and Jokisch Develop a Dynamic, Life-Cycle, General Equilibrium Model to Study the Interdependent Demographic, Fiscal, and Economic Transition Path of China, Japan, the United States, and the EU

Academic journal article NBER Reporter

Kotlikoff, Fehr, and Jokisch Develop a Dynamic, Life-Cycle, General Equilibrium Model to Study the Interdependent Demographic, Fiscal, and Economic Transition Path of China, Japan, the United States, and the EU

Article excerpt

Kotlikoff, Fehr, and Joldsch develop a dynamic, life-cycle, general equilibrium model to study the interdependent demographic, fiscal, and economic transition path of China, Japan, the United States, and the EU. Each of these countries/regions is entering a period of rapid and significant aging that will require major fiscal adjustments. But the aging of these societies may be a cloud with a silver lining, in this case, in the form of capital deepening that will raise real wages. In a previous model that excluded China, these authors predicted that tax hikes needed to pay benefits along the developed world's demographic transition would lead to a major capital shortage, reducing real wages per unit of human capital over time by one fifth. A reformulation of their original model to incorporate government investment suggests that this concern was overstated. With the inclusion of government investment, they find much less crowding out over the course of the century and only a 4 percent long-run decline in real wages. Adding China to the model further alters, indeed dramatically alters, the model's predictions. …

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