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Aging Economies May Benefit Less From Fiscal Stimulus: IMF

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Fiscal stimulus in economies with a younger population has a significantly positive effect on growth, but the effect is much weaker in aging economies, a blog authored by by Jiro Honda and Hiroaki Miyamoto on the IMF website says.

"In the midst of the current COVID-19 pandemic, policymakers around the world are undertaking fiscal stimulus-a combination of spending increases and tax reductions-to support their economies. Even before the present crisis, the importance of fiscal policy has been increasing, with monetary policy constrained by near-zero interest rates. Our new staff research finds that age also matters when considering fiscal stimulus. Specifically, we find that fiscal policy isn't as effective in boosting growth in economies with older populations, compared to economies with younger populations," the report says.

"We looked at 17 Organization for Economic Cooperation and Development countries from 1985 to 2017, and split the sample into two groups by looking at the ratio of old people among population. In the aging economies, the average old-age dependency ratio (defined as the ratio of people 65 and older to those between 15 and 64 years old) is 26.5 percent whereas in non-aging economies it is 18.9 percent," the IMF blog states.

Aging Economies May Benefit Less From Fiscal Stimulus: IMF
 

"On a more granular level, an aging economy behaves this way because its labor force isn't growing, while its public debt tends to be high, and, therefore, fiscal stimulus has weaker effects on private consumption and investment. This is because the working age population is more likely than retirees to benefit from fiscal stimulus through effects such as increased corporate hiring. Furthermore, many pensioners are on fixed incomes whose consumption remains steady or even declines over time. In addition, population aging could reduce potential growth (by lowering labor input and productivity), with which fiscal stimulus may induce less private investment. The "older" the economy and the higher its debt, the less impact fiscal stimulus has on growth," the report noted

Read more about: imf fiscal
Story first published: Saturday, August 8, 2020, 10:26 [IST]
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