2019, Paper for the ECB Forum on Central Banking - 20 Years of European Economic and Monetary Union
Co-authored with Axel Börsch-Supan and Johannes Rausch
This paper describes how population aging will shape long run economic development in the euro zone. We argue that the extent of the demographic changes is dramatic and will deeply affect future labor, financial and goods markets. The expected strain on public budgets – especially public pension, health and long-term care systems – has received prominent attention, but population aging poses many other economic challenges that threaten productivity and growth if they remain unaddressed, thereby also putting central banks under pressure.
While aging is global, there are marked differences in the underlying causes, speed and extent of aging across countries, even within the euro zone. These differences will generate different growth paths and change the international pecking order. Thanks to the globalization of labor, financial and goods markets, however, these differential demographic developments can be exploited together with higher capital intensity and digitalization. This offers large chances during the aging process.
2018, MEA Discussion Papers
Co-authored with Klaus Härtl
Abstract: This paper focuses on the empirically observed relationship between demographic change and inflation and theoretically explores the nature of this puzzling relationship. It puts the opposing existent empirical findings in the literature into perspective by using an overlapping-generations (OLG) framework combined with a money-in-the-utility (MIU) model. When facing demographic change, individuals’ life-cycle decisions affect consumption demand and money holdings and, consequently, price changes. We differentiate demographic change between changes in population size and structure and determine how these separately affect inflation in an aging society. Changes in population size are the main driver of the aging-inflation connection while changes in population structure are of a smaller magnitude. We also explore how the introduction and subsequent implications of a public pay-as-you-go (PAYG) pension system have a negative impact on inflation. In contrast, endogenous labor reactions are found to have a mitigating effect on this negative effect on inflation. A simulation of different stages of demographic change and size of pension systems is carried out for a sample of countries. Findings suggest that aging countries with generous PAYG pension systems face strong deflationary pressures while younger countries face inflationary pressures.
2018, MEA Discussion Papers
Co-authored with Axel Börsch-Supan, Klaus Härtl and Alexander Ludwig
Abstract: We propose a unified framework to measure the effects of different reforms of the pension system on retirement ages and macroeconomic indicators in the face of demographic change. A rich overlapping generations (OLG) model is built and endogenous retirement decisions are explicitly modeled within a public pension system. Heterogeneity with respect to consumption preferences, wage profiles, and survival rates is embedded in the model. Besides the expected direct effects of these reforms on the behavior of households, we observe that feedback effects do occur. Results suggest that individual retirement decisions are strongly influenced by numerous incentives produced by the pension system and macroeconomic variables, such as the statutory eligibility age, adjustment rates, the presence of a replacement rate, and interest rates. Those decisions, in turn, have several impacts on the macro-economy which can create feedback cycles working through equilibrium effects on interest rates and wages. Taken together, these reform scenarios have strong implications for the sustainability of pension systems. Because of the rich nature of our unified model framework, we are able to rank the reform proposals according to several individual and macroeconomic measures, thereby providing important support for policy recommendations on pension systems.
2017, NBER Working Papers and MEA Discussion Papers
Co-authored with Axel Börsch-Supan, Klaus Härtl
Abstract: In response to the challenges of increasing longevity, an obvious policy response is to gradually increase the statutory eligibility age for public pension benefits and to shut down pathways to early retirement such as special rules for women. This is, however, very unpopular. As an alternative, many countries have introduced “flexibility reforms” which allow combining part-time work and partial retirement. A key measure of these reforms is the abolishment of earnings tests. It is claimed that these reforms increase labor supply and therefore, also the sustainability of pension systems. We show that these claims may not be true in the circumstances of most European countries. To this end, we employ a life-cycle model of consumption and labor supply where the choices of labor force exit and benefit claiming age are endogenous and potentially separate. Earnings tests force workers to exit the labor market when claiming a pension. After abolishing the earnings test, workers can claim their benefits and can keep on working, potentially increasing labor supply. Our key result is that the difference between exit and claiming age strongly depends on the actuarial neutrality of the pension system and can become very large. Abolishing an earnings test as part of a “flexibility reform” may therefore create more labor supply but at the same time, reduce the average claiming age when adjustments remain less than actuarial, thereby worsening rather than improving the sustainability of public pension systems.
2017, MEA Discussion Papers
Co-authored with Axel Börsch-Supan, Klaus Härtl
Abstract: Pension economics has traditionally guided pension policy with the help of formal models based on individuals who think in a life cycle context with perfect foresight, full information and in a time-consistent manner. This paper sheds light on selected aspects of pension economics when these assumptions do not hold. We focus on three aspects which are particularly relevant for the quickly aging Asian economies: the volume of savings for old-age provisions, international diversification of retirement savings, and global spillover effects of pension reforms.
2016, MEA Discussion Papers
Co-authored with Axel Börsch-Supan, Klaus Härtl
Abstract: When the challenges of population aging are being debated, the uncertain future of pension systems is a topic of high priority and large controversy. The aim of this chapter is not to provide a “consensus view” on social security and public insurance in aging populations but to put structure on these debates. We formulate a large set of models which we use for simulation exercises to make the challenges and controversies more transparent. The chapter begins with an institutional view of pension systems and population aging which defines the fundamental accounting restrictions which population aging imposes on individual behavior and policy actions. We also provide a brief survey of pension systems in the real world. We then take a behavioral view and study saving and labor supply decisions in an aging population. The third viewpoint is from macroeconomics and focuses on the feedback effects that occur in general equilibrium. We demonstrate that market reactions to population aging significantly reduce the burden of parametric or systemic pension reform. The chapter ends with a short summary of the main lessons and an outlook where further research is most urgently needed.
2015, FEP Working Papers
Co-authored with Óscar Afonso and Sandra T. Silva
Abstract: Understanding the causes of the Industrial Revolution, namely the process of transition from a Malthusian equilibrium to Modern Economic Growth, has been the subject of a passionate debate. This paper adds more to the insights on the process of industrialization and the demographic transition that followed this period. We present a model that incorporates the willingness of landowners to support workers in providing education to their children. The model proposes a mechanism behind the claim that landed elites had strong incentives to oppose education reforms. By applying the theory of interest groups to landownership, landowners can delay education but cannot prevent its introduction indefinitely. The existence of this delay fits the predictions of the late boom of industry and demographic transition during the industrialization period. We also contribute to the debate regarding agricultural progress before the Industrial Revolution. We sustain that an Agricultural Revolution prior to the Industrial Revolution may have induced a positive impact on the landowners’ decision to educate the population. A theoretical model is presented and numerical simulations are exhibited to illustrate our claims.
2014, FEP Working Papers
Co-authored with Óscar Afonso and Sandra T. Silva
Abstract: This paper proposes a North-South model that encompasses today’s migratory movements and concentration of highly educated population and population with high scientific potential in developed countries. It explains the mechanisms involved in this process and it shows how the technological-knowledge gap is hard to reverse, namely when the majority of scientists are concentrated in the North. A possible path for convergence path between the North and the South requires the South to stop producing goods similar to the ones from the North and, instead, to complement the production of northern goods. In addition, the implications of having either perfect- or no-labor mobility of unskilled labor between countries are studied. The analysis suggests a positive correlation between inflows of skilled labor to the North and the level of substitutability in production. These results are compared to the available data. Additionally, the model is implemented numerically in order to study the dynamics of countries and agents suggested by the model. The outcomes are consistent with the dynamics observed in actual data. Scientists’ incentives via trade conditions are highlighted as the main sources of divergence /convergence between countries.
2013, FEP working papers
Co-authored with Sandra T. Silva and Óscar Afonso
Abstract: Institutions crucial for the analysis of how agents deal with uncertainty have been gaining increasing relevance on the economic research agenda. In this paper, we analyze the institutional literature aiming to explain why this perspective obtains better results than others in development economics. In particular, we stress the relevance of New Institutional Economics as an adequate framework for a broad understanding of development issues.