(Photo: Mint)
(Photo: Mint)

Ageing populace leads to toothless policies

As labour supply declines in ageing economies, fiscal and monetary policies may fail to drive consumption and growth, says new study

Mumbai: Declining fertility and rising life expectancies have created the challenge of ageing populations for economies across the world. And because of this, macroeconomic policies need to address demography to be truly effective, suggests research.

In a new Asian Development Bank Institute study, Naoyuki Yoshino and Hiroaki Miyamoto examine the impact of population ageing on the effectiveness of monetary and fiscal policies. The authors first examine the effect of macroeconomic policies on Japan, a rapidly ageing country. They find that in Japan a declining working population has pulled down output, consumption and investment. Even expansionary monetary policies to boost consumption fall short as the proportion of the working population impacted by the policy decreases with ageing. On the other hand, allowing retirees to return to the labor force drives both greater transmission of monetary policy and long term growth. This is because an increase in the working population reduces workers’ tax burden to fund social security benefits and boosts overall consumption.

Next, they use OECD data on government spending of 43 countries between 1996-2017 to measure the impact of a 1% increase in government spending on economies with different demographic profiles. While countries with a larger share of young populations responded with an increase in output by 0.3% in the same year and 1.3% in the medium term, the impact was not significant in ageing economies.

As both monetary and fiscal policy may prove ineffective in driving long term growth in ageing economies, the authors instead recommend structural reforms such as postponement of retirement age and setting wage rates based on productivity. These policies could also be relevant for some states in India, such as Kerala and Tamil Nadu, that could soon face similar ageing challenges.

Also read: How Does Population Aging Affect The Effectiveness Of Monetary

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