Abstract
We develop a demographic macroeconomic model that captures the salient life-cycle features at the individual level and, at the same time, allows us to pinpoint the main mechanisms at play at the aggregate level. At the individual level the model features both age-dependent mortality and productivity and allows for less-than-perfect annuity markets. At the aggregate level the model gives rise to single-sector endogenous growth and includes a Pay-As-You-Go pension system. We show that ageing generally promotes economic growth due to a strong savings response. Under a defined benefit system the growth effect is still positive but lower than under a defined contribution system. Surprisingly, we find that an increase in the retirement age dampens the economic growth expansion following a longevity shock.
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Acknowledgments
We thank Jan van Ours and Laurie Reijnders for helpful comments and remarks. This paper was written during the second author’s visit to the Department of Economics of the University of Washington. The department’s hospitality is gracefully acknowledged.
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Open Access This is an open access article distributed under the terms of the Creative Commons Attribution Noncommercial License (https://creativecommons.org/licenses/by-nc/2.0), which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.
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Heijdra, B.J., Mierau, J.O. The Individual Life Cycle and Economic Growth: An Essay on Demographic Macroeconomics. De Economist 159, 63–87 (2011). https://doi.org/10.1007/s10645-010-9153-2
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DOI: https://doi.org/10.1007/s10645-010-9153-2