Macroeconomic Impact of Population Aging in Japan Using an Overlapping Generations Model

Abstract

This paper simulates the effect of the demographic transition in Japan on aggregate macroeconomic outputs. Our model uses the open source overlapping generations general equilibrium model provided by DeBacker and Evans (2018). We calibrate the model to include Japanese demographics, tax rates, and labor parameters, including the elasticity and disutility of labor.

Our simulations indicate Japan’s declining fertility rates result in a modal population age of around 70 by 2100. An aging population and declining workforce decrease government revenue while increasing government spending, making current government spending patterns unsustainable in the long-term. Our steady-state results require negative government spending. This implies tax revenues will not be able to cover anticipated government spending in the future.