Policy uncertainty and cost of delaying reform: The case of aging Japan

Sagiri Kitao

Research output: Contribution to journalArticle

11 Citations (Scopus)

Abstract

Reform is inevitable in an aging economy with a generous pay-as-you-go social security system. Often, however, the timing and structure of reform are unknown. We explicitly model policy uncertainty in a general equilibrium life-cycle model and let agents update expectations and react as uncertainty is resolved over time. Using the case of Japan, a country facing severe demographic and fiscal challenges, we quantify welfare tradeoff across generations by delaying reform or reducing its scope. Individuals respond to a delay by dis-saving and working less, while facing higher taxes to cover additional expenditures during the transition. Fiscal uncertainty itself has a more significant adverse effect on older individuals, who face greater income risks and a lower return on their retirement savings.

Original languageEnglish
Pages (from-to)81-100
Number of pages20
JournalReview of Economic Dynamics
Volume27
DOIs
Publication statusPublished - 2018 Jan 1

Keywords

  • Aging demographics
  • Fiscal sustainability
  • Japanese economy
  • Pension reform
  • Policy uncertainty

ASJC Scopus subject areas

  • Economics and Econometrics

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