DP3567 Public Saving and Policy Coordination in Ageing Economies

Author(s): Martin Flodén

Publication Date: October 2002

Keyword(s): demographics , international capital flows , public debt , optimal taxation

JEL(s): E62 , F21 , H21 , H60 , J18

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP3567.asp

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. Furthermore, since the population ageing will be less dramatic in the United States than in Europe, capital will move from Europe to the United States. These capital movements will facilitate the US demographic transition but aggravate the transition in most European countries.