The young, the old, and the government: demographics and fiscal multipliers

Series: Working Papers. 1837.

Author: Henrique S. Basso and Omar Rachedi.

Published in: American Economic Journal: Macroeconomics.

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The young, the old, and the government: demographics and fiscal multipliers (875 KB)

Abstract

We document that fiscal multipliers depend on the age structure of the population. Using the variation in military spending and birth rates across U.S. states, we show that local fiscal multipliers increase with the share of young people in total population. We rationalize this fact with a parsimonious life-cycle open-economy New Keynesian model with credit market imperfections. The model explains 65% of the relationship between local fiscal multipliers and demographics. We use the model to study the implications of population aging, and find that nowadays U.S. national fiscal multipliers are 36% lower than in 1980.