Effects of Demographic Change on Growth and Fiscal balance:
Using an Annual Macro-Fiscal Model

Myung-Kee Sung
Division of Economic Analysis, NABO

As Korea’s population growth rate(PGR) has rapidly declined, the concern of low fertility rate and population aging has been spread out in the policy making procedure and the public. This study analyzes the effects of demographic change on growth and fiscal balance using an annual macro-fiscal econometric model.
In line with this purpose, the macro-fiscal model explicitly considers linkage between macro sector and fiscal sector, and reflects on how the demographic change effects on growth and fiscal balance in the long-run. The macro-fiscal model is constructed by 7 sectors: aggregate supply, final demand, fiscal, finance, labor, price, and foreign trade. This model consists of 53 simultaneous equations system, which includes 36 behavior equations and 17 identities.
In policy simulation using the macro-fiscal model, if the total dependency ratio and aged-child ratio reflecting demographic change rises by 5%, potential GDP would be weakened because of contracting in labor sector, and government fiscal balance would be worsen owing to expanding of a expenditure in social welfare comparing with baseline.