The Young, the Old, and the Government: Demographics and Fiscal Multipliers

Abstract

We document that government spending multipliers depend on the population age structure. Using the variation in military spending and birth rates across US 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 interquartile 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 percent of the relationship between local multipliers and demographics. The model implies that the US population aging between 1980 and 2015 caused a 38 percent drop in national government spending multipliers. (JEL D15, E12, E24, E62, J11, J22, J23)

Heterogeneous Spending, Heterogeneous Multipliers

“…This literature has highlighted the role of the business cycle (Riera-Crichton et al, 2015;Suárez-Serrato and Wingender, 2016;Buchheim et al, 2020), trade openness (Ilzetzki et al, 2013;Corbi et al, 2019), the exchange rate 4 ©International Monetary Fund. Not for Redistribution regime (Born et al, 2013), population demographics (Basso and Rachedi, 2021), households' heterogeneity (Hagedorn et al, 2019), labor market rigidity (Cole and Ohanian, 2004;Gorodnichenko et al, 2012), automatic stabilizers (Dolls et al, 2012;Galeano et al, 2021), public indebtedness (Ilzetzki et al, 2013), the degree of monetary policy accommodation (Woodford, 2011), firm-size distribution (Juarros, 2020), and the direction of the intervention (Barnichon et al, 2020) in amplifying the response of economic activity to public spending. This paper concentrates on the characteristics of the fiscal spending itself rather than the characteristics of the economy.…”

Decomposing the Government Transfer Multiplier

“…Nakamura and Steinsson (2014) first introduce the "open economy relative multiplier" terminology. Other papers using this concept includeBasso and Rachedi (2021),Berge, et.al. (2021) andLu and Zhu (2021).4 The existing pertinent research typically defines a spillover treatment as the treatment of a nearby region or averaged over several nearby regions using some measure of closeness (e.g., trade flows and geographic proximity).…”