Decreased Effectiveness of Fiscal and Monetary Policies in Japan’s Aging Society | Asian Development Bank

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Decreased Effectiveness of Fiscal and Monetary Policies in Japan’s Aging Society

Publication | March 2017
Decreased Effectiveness of Fiscal and Monetary Policies in Japan’s Aging Society

As retirees make up more and more of the population, fiscal and monetary policies become less effective.

We study how an aging population affects economic performance and the effectiveness of fiscal and monetary policies. We develop a New Keynesian dynamic stochastic general equilibrium model with heterogeneous households, workers, and retirees. We demonstrate that an increase in the proportion of working population increases aggregate output, consumption, and investment by increasing total labor supply in the long run. It also increases wages and reduces social security burden of the government. We also find that effectiveness of fiscal and monetary policies is weakened when the proportion of retirees becomes larger. This is the reason why recent monetary policies cannot lift the Japanese economy from prolonged stagnation.

WORKING PAPER NO: 691