Effective fiscal policy in an aging economy: Evidence from a BVAR analysis

As people age, their consumption and saving behavior tends to change. At the same time, the share of age-related public spending increases, leaving less resources for fiscal stimulus, especially if public debt ratio is already high. Using Finnish data in a Bayesian VAR model, we show that the composition of public spending matters for the effectiveness of fiscal stimulus in an aging economy. Our results suggest that increasing social transfers targeted mostly to the elderly boosts the economy less than increasing consumption expenditure that financially benefits the working aged population. This is due to a different saving and consumption behavior of the population group benefitting from the fiscal impulse. The results imply that in an aging economy targeting fiscal measures becomes more important than ever.