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Macroeconomic and distributional effects of demographic change in an open economy—the case of Belgium

Published online by Cambridge University Press:  07 February 2020

Willem Devriendt Open the ORCID record for Willem Devriendt [Opens in a new window]  and
Freddy Heylen
Willem Devriendt
Affiliation:
Department of Economics, Ghent University, Sint-Pietersplein 6, 9000Ghent, Belgium
Freddy Heylen*
Affiliation:
Department of Economics, Ghent University, Sint-Pietersplein 6, 9000Ghent, Belgium
*
*Corresponding author. E-mail: [email protected]
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Abstract

We construct and parameterize an overlapping generations model for an open economy with individuals who differ in innate ability. Key endogenous variables are hours worked, investment in human and physical capital, and per capita growth. The model replicates important data in Belgium since 1960 remarkably well. Simulating it, we observe that behavioral adjustments by households and firms contribute to reverse the negative arithmetical effect of future demographic change on per capita growth. Individuals work and study more. However, with unchanged policies, there remains a net negative effect on annual per capita growth of almost 0.3%-points on average in the next 25 years. This is mainly due to adverse consequences of reduced fertility and a declining working-age population on (the return to) physical capital investment. Model projections also point to rising income inequality induced by demographic change. Differences in the capacity of individuals to respond to increasing life expectancy by investing in education, and by saving, are key.

Keywords

Demographic changeeconomic growthinequalityoverlapping generationspopulation agingsecular stagnation

JEL classification

C68: Computable General Equilibrium Models E17: Forecasting and Simulation: Models and Applications O40: General J11: Demographic Trends, Macroeconomic Effects, and Forecasts D91: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making‡
Type
Research Papers
Information
Journal of Demographic Economics , Volume 86 , Issue 1 , March 2020 , pp. 87 - 124
Copyright
Copyright © Université catholique de Louvain 2020

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