Public saving and policy coordination in aging economies

by Martin Floden

In the coming decades, the share of people in working age will fall significantly in most developed countries. According to optimal taxation theory, public debts should be reduced before the baby-boom generation retires. I find that if debts are instead maintained at the current levels, welfare may be reduced substantially in countries with a large public sector and/or a large demographic change. Since the population aging will be less dramatic in the United States than in Europe and Japan, capital will move from Europe and Japan to the United States. These capital movements will facilitate the U.S. demographic transition but aggravate the transition in most European countries.

JEL classification: E62; F21; H21; H60; J18
Keywords: Demographics; International capital flows; Public debt; Optimal taxation

Download paper: May 2003 (PDF 0.2 Mb)
A previous version of the paper is available as CEPR Discussion Paper No. 3567 (August 2002)

Matlab code and data

The matlab code solving the model is avialble in (3.4 Mb). The important files and directories in this zip file are:

main.m This is the main matlab file. It will be clear which files are called by main.
csolve.m An equation solver due to Chris Sims.
\popdata A directory with population data
\popdata\generate_pop.m A program that reads the raw population data from the asc files and saves relevant data (including some country specific policy variables) in countryValues.mat
\results A library with result files. If the result files are available, main.m will use the relevant results as its initial guess. The code updates these result files when it finds new solutions.
Code that generate tables and figures used in the paper.