Pension Policies and International Capital Mobility

Abstract

The effects of pension policies on households’ and firms’ behaviour depend on the international mobility of financial capital. We compare the policy effects between three regimes: a perfect capital mobility regime, a flow equilibrium regime where domestic interest rates react to current account developments, and a portfolio adjustment regime where the net foreign debt affects the domestic interest rate. We consider three different pension policies: an increase in the retirement age, a decrease in the pension benefit level and a temporary variation in the pension fund. The long-run policy effects are equal with perfect capital mobility and the flow equilibrium regime, but the short-run effects are different and the transition period is longer with the latter. In the portfolio adjustment regime even the long-run effects are different when the policy changes are permanent. Thus the degree of international capital mobility is important e.g. for the changes in intergenerational distribution. The effects on the pension contribution rate, on the other hand, are almost independent of the interest rate behaviour.KeywordsInterest RatePension FundPension SystemCapital MobilitySmall Open EconomyThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.