Demographic Changes, Fiscal Policy And Economic Growth: Theory And Evidence

Demographic changes have two faces: a falling birth rate, and a longer life expectancy. This paper analyzes the effect that those two phenomena have on fiscal policy and economic growth in a politico-economic model of endogenous growth. In particular, the model is framed in continuous time to cope with problems that existing studies (OLG models) have in common. In the authors' model, income taxes are used to finance public investment, which in turn drives economic growth. Consumers who live for a finite time length have their own ideal tax rate, given a trade-off between current and future consumption.