The Young, the Old, and the Government: Demographics and Fiscal Multipliers
Henrique S. Basso
- American Economic Journal: Macroeconomics (Forthcoming)
We document that government spending multipliers depend on the
population age structure. Using the variation in military spending
and birth rates across U.S. states, we show that the local fiscal multiplier is 1.5 and increases with the population share of young people, implying multipliers of 1.1-1.9 in the inter-quartile range. A
parsimonious life-cycle open-economy New Keynesian model with
credit market imperfections and age-specific differences in labor
supply and demand explains 87% of the relationship between local
multipliers and demographics. The model implies that the U.S.
population aging between 1980 and 2015 caused a 38% drop in
national government spending multipliers.
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