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 language | English |
|---|---|
| Pages (from-to) | 81-100 |
| Number of pages | 20 |
| Journal | Review of Economic Dynamics |
| Volume | 27 |
| DOIs | |
| Publication status | Published - 2018 Jan 1 |
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Keywords
- Aging demographics
- Fiscal sustainability
- Japanese economy
- Pension reform
- Policy uncertainty
ASJC Scopus subject areas
- Economics and Econometrics
Cite this
Policy uncertainty and cost of delaying reform : The case of aging Japan. / Kitao, Sagiri.
In: Review of Economic Dynamics, Vol. 27, 01.01.2018, p. 81-100.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Policy uncertainty and cost of delaying reform
T2 - The case of aging Japan
AU - Kitao, Sagiri
PY - 2018/1/1
Y1 - 2018/1/1
N2 - 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.
AB - 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.
KW - Aging demographics
KW - Fiscal sustainability
KW - Japanese economy
KW - Pension reform
KW - Policy uncertainty
UR - http://www.scopus.com/inward/record.url?scp=85034615963&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85034615963&partnerID=8YFLogxK
U2 - 10.1016/j.red.2017.11.005
DO - 10.1016/j.red.2017.11.005
M3 - Article
VL - 27
SP - 81
EP - 100
JO - Review of Economic Dynamics
JF - Review of Economic Dynamics
SN - 1094-2025
ER -