The Fiscal Impact of Population Aging in the United States by Henry J. Aaron

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1 The Fiscal Impact of Population Aging in the United States by Henry J. Aaron Comments by Naoyuki Yoshino Professor of Economics, Keio University, Japan

8 Bond Market Japan and Greece

9 Holdings of Greece Debt

12 Domar Condition The Domar condition is obtained from government budget constraints as follows. G t + r t B t 1 = ΔB t + T t Government budget constraint (1) Equation (1) states that government spending (G t )+interest payments (= r t B t 1 ) =new issue of government bonds(δb t )+tax revenue(t t ) Divide Equation (1) by GDP (Y t ) and rewrite Equation (1) b t b t 1 = r t η t 1+η t b t 1 + g t t t The Domar Condition (2) where b t = B t Y t, η t = Y t Y t, g t = G t Y t, and t t = T t Y t We also mention that we can derive the Domar condition from our government objective function (Equation (?)). From this equation, b t 1 = 2w 5 b t b t 1 = r t η t 1+η t setting up other policy weights as zero, i.e, w i = 0, i = 1,, 4.

13 G t + r t B t 1 = ΔB t + T t Government Budget Constraint=Supply of government bonds (3) A simple macro model which includes the demand side of the government bond can be constructed as follows. Equation (3) is the disposable income where wage income, transfer payment from the government and interest receipt from the government bonds minus tax payments. The disposable income is distributed consumption and savings. Savings are allocated to purchase of government bonds, increase in domestic deposits and investment into foreign countries. For simplicity, the foreign assets holdings is regarded as exogenous. The disposable income is defined as income (Y t ) plus government transfer to households (θg t ) plus interest receipt of government bond (r t B t 1 ) by households minus tax payment (T t ) as follows. The disposable income is divided into consumption (C t ) and savings (S t ) YY t = Y t + θg t + r t B t 1 T t = C t + S t where S t = ΔB t + ΔW t D W t F (4) Savings(S t )=Government bonds(δb t )+Domestic Deposits(ΔW t D ) Foreign assets( W t F ) W t F = W F Foreign assets are assumed to be constant (5) C t = c 0 + c 1 YY t Consumption Equation (6) W t D = d 0 + d 1 YY t + d 2 r t where r t = r t r t 1 Deposit Equation (7)

14 Fiscal Policy Rule B t = 1 θ 1 c 1 d 1 B t 1 +d 2 G t G t = G t 1 + w 1 1+ c B w t B 1 +d 1 1 θ B t 1 t 3, Y t G t = θ, B t G t = 1 θ 1 c 1 d 1 B t 1 +d 2 w 2 w 3 θ Y t Y t f + w 5 w 3 B t B t 1+ c 1 +d 1 1 θ B t 1 (22) G t G t 1 = α 1 B t B t + α 2 B t B t + α 3 Y t Y t f (23) where α 1 = w 1 w 3 = w T 1 B t B t t where B t T t = 1+ c 1 +d 1 1 θ B t 1, α 2 = w 5 w 3 B t T t 1+ c 1 +d 1 1 θ B t 1, α 3 = w 2 w 3 θ + w 2 Y t T t Y t Y t f + w 4 T t T t 1 + w 5 B t B t B t T t = 0 d 2, Y t T t = 1, B t T t = d 2 T t T t 1 = β 1 B t B t + β 2 B t B t + β 3 Y t Y t f β 1 = w 1 w 4 d 2, β 2 = w 5 w 4 d 2, β 3 = w 2 w 4 (24)

15 DSGE Model McNelis and Yoshino 1, Fiscal Policy Rule Government Spending and Tax Revenue 2, Increase working labor Old people to work, retirement age female participation in labor force ( child care facilities etc.) 3, Wage rate should be determined by market Seniority wage rate should be abolished (4) Medical care for elderly people huge medical costs for terminal care

16 References Revankar N. and Yoshino, N., (2008) An Empirical Analysis of Japanese Banking Behavior in a Period of Financial Instability, Keio Economic Studies, Vol.45 No.1. Yoshino, Naoyuki and Tomohiro Hirano (2011) Pro-cyclicality of the Basel Capital Requirement Ratio and Its Impact on Banks Asian Economic Papers, MIT Press, Vol.10,No.2. Yoshino, Naoyuki and Tomohiro Hirano (2013) Counter-cyclical Buffer of the Basel Capital requirement and its empirical Analysis, IMF, Current Development in Monetary and Financial Law, 6, Restorering Financial Stability, International Monetary Fund, Washington DC. Yoshino, N.,(2011) Growing Budget Deficits and Sustainability: Why is Japan still sustainable? APEC, SME Economic Crisis Monitor, July-2011 Issue, 5-6. McNelis Paul and N. Yoshino (2012), Macroeconomic Volatility Under High Accumulation of Government Debt: Lessons from Japan Advances in Complex Systems 2012 Yoshino, N. and T. Mizoguchi (2013) Changes in flow of funds of 16 Japan and fiscal policy rule, Public Policy Review, January 2013.

17 Yoshino, Suzuki, Maehara and Abe (2009) Development of Corporate Credit Information Database and Credit Guarantee System, ASEAN Secretariat, Feb Yoshino, N. (2010) Financing Transport Infrastructure Development in Southeast Asia OECD, Southeast Asian Economic Outlook, 2010, Nov., Chapter 6, OECD, Paris. Yoshino N. (2012) The Global Imbalance and the Development of Capital Flows among Asian Countries, OECD Journal: Financial Market Trends, Volume 1, 2012 Yoshino N. Kaji, S. and Asonuma T. (2012) Choices of Optimal Monetary Policy Instruments Under the Floating and the Basket-Peg Regimes, Singapore Economic Review, December Yoshino N. Kaji, S. (2013) Hometown Investment Trust Funds, 17 Springer, March 2013

Abenomics and Asian Economy

Abenomics and Asian Economy Naoyuki Yoshino Dean, Asian Development Bank Institute Professor Emeritus, Keio University, Japan nyoshino@adbi.org Farhad Taghizadeh PhD Candidate, Keio University, Japan 2014