Endogenous Growth in an Aging Economy: Evidence and Policy Measures

Abstract

This paper presents a two-sector overlapping generation (OLG) model to capture the impact of population aging on a regional economy (Illinois) and compares the effectiveness of government policy in an endogenous growth perspective. Comparing the computational results of a one-sector OLG model, where an agent’s productivity is given exogenously, this paper confirms that endogenously determined investment in human capital significantly offsets the negative effects of the aging population on the regional economy. This paper also explores if there is room for the government to weaken and prevent the negative effects of the aging population. This paper examines the effects of two kinds of government transfer systems on the regional economy: money transfer and educational transfer systems. The money transfer, which is redistributed to agents by the government, could be used for an individual’s consumption, saving and educational investment. Educational transfer is made directly to the individual proportional to his or her opportunity cost stemming from educational investment. The results show that the educational transfer system is superior to the money transfer system in the long run in terms of per-capita income growth, aggregate welfare improvements and factor price stabilization. However, the results imply that the implementation of an educational transfer system accompanies trade-offs between economic growth and a more equal distribution of income and wealth.