Endogenous fiscal policy and capital market transmissions in the presence of demographic shocks

Previous analyses of population aging mainly focused on the social security implications of the aging trend. This paper addresses aging in an open economy framework with two regions that have politically responsive fiscal policy regarding education finance. Demographic shocks start an economic growth process but results are sensitive to a critical parameter in the model that indicates return to education spending. Low values of this parameter are associated with less favorable economic outcomes. Hence, a policy implication emerges that enhancing the education system might pay off in terms of easing the negative growth and welfare consequences of expected demographic shocks.