The Budgeting and Economic Consequences of Ageing in The Netherlands

The costs of population ageing are primarily reflected in larger expenditures on pensions and health care. This paper explores the consequences of ageing for the Netherlands in a baseline scenario simulated with a dynamic general equilibrium model. We discuss the sensitivity of the results under alternative projections for population ageing. We explore also the effects of three types of social security reform: a reduction in benefits, an increase in the retirement age and smoothing of the public pension premium over time. We find that the welfare effects of ageing and the reforms are substantial.

Implementing the stability and growth pact: enforcement and procedural flexibility

The paper proposes a theoretical analysis illustrating some key policy trade-offs involved in the implementation of a rules-based fiscal framework reminiscent of the Stability and Growth Pact (SGP). The analysis offers some insights on the current debate about the SGP. Specifically, greater "procedural" flexibility in the implementation of existing rules may improve welfare, thus increasing the Pact’s political acceptability. Here, procedural flexibility designates the enforcer’s room to apply well-informed judgment on the basis of underlying policies and to set a consolidation path that does not discourage high-quality policy measures. Yet budgetary opaqueness may hinder the qualitative assessment of fiscal policy, possibly destroying the case for flexibility. Also, improved budget monitoring and greater transparency increase the benefits from greater procedural flexibility. Overall, we establish that a fiscal pact based on a simple deficit rule with conditional procedural flexibility can simultaneously contain excessive deficits, lower unproductive spending and increase high-quality outlays. JEL Classification: E62, H6deficits, fiscal rules, procedural flexibility, Stability and Growth Pact, structural reforms

Structural Distortions and Decentralized Fiscal Policies in EMU

The combination of discretionary monetary policy, labor-market distortions and nominal wage rigidity yields an inflation bias as monetary policy tries to exploit nominal wage contracts to address labour-market distortions Although an inflation target eliminates this inflation bias, it creates a conflict between monetary policy and discretionary fiscal policy if fiscal policy is set at a higher frequency than nominal wages are. To avoid the associated excessive accumulation of public debt, ceilings on public debt are called for. If countries differ substantially in terms of structural distortions or economic shocks, uniform debt ceilings must be complemented by country-specific debt targets in order to prevent decentralised fiscal authorities from employing debt policy strategically.Discretionary monetary policy, wage rigidity, decentralized fiscal policy, monetary union, inflation targets, debt targets

Risk Sharing in Defined-Contribution Funded Pension Systems

This paper explores the introduction of collective risk-sharing elements in defined contri-bution pension contracts. We consider status-contingent, age-contingent and asset contingent risk-sharing arrangements. All arrangements raise aggregate welfare, as measured by equiva- lent variations. While working individuals hardly benefit or may even lose, retirees experience substantial welfare gains. An increase in the tax deductability of pension contributions can be beneficial for working cohorts, but comes at the cost of a reduction in aggregate welfare due to efficiency losses.funded pensions, risk-sharing, defined contribution, inter-generational welfare, equivalent variation, stochastic simulations

The Effect of Monetary Unification on Public Debt and its Real Return

We explore the implications of monetary unification for real interest rates and (relative) public debt levels. The adoption of a common monetary policy renders the risk-return characteristics of the participating countries more similar, so that the substitutability of their public debt increases after unification. This implies that the average expected real return on the debt increases. Also, the share of the unionwide debt issued by relatively myopic governments or of countries that initially have a relatively dependent central bank increases after unification. This may put the political sustainability of the union under pressure. A transfer scheme that penalizes debt increases beyond the union average is able to undo the interest rate effect of unification, but magnifies the spread in relative debt levels.monetary union, (relative) public debt, interest rates, externalities, substitutability, central bank independence

Inter- and Intra-generational Consequences of Pension Buffer Policy under Demographic, Financial and Economic Shocks

We study numerically the inter- and intra-generational welfare consequences of alternative pension fund policies in response to unexpected demographic, financial and macro-economic shocks. Our analysis is based on an applied many-generation OLG model describing a small-open economy with heterogeneous agents featuring a two-pillar pension system (with PAYG and funded tiers). We explore two policies to avoid underfunding of the pension funds. One is to always first raise the pension contribution rate ("contribution policy"), the other is to always first reduce indexation to productivity and price inflation ("indexation policy"). These policies have different consequences for different generations. Of the existing generations, on average the youngest prefer the indexation policy, while the older generations prefer the con-tribution policy. When expressed in terms of a constant difference in rest-of-life consumption the consequences of switching from one to the other policy are generally non-negligible. They also differ rather widely for the various cohort/income groups. Our stochastic simulations show that pension buffers are highly volatile when the shocks are drawn from realistically modelled multivariate shock processes. Underfunding occurs relatively frequently. Most of the volatility arises from uncertainty about the yield curve (the rate at which pension liabilities are discounted).funded social security, pension fund policy, shocks, funding ratio, stochastic simulations

Pension Systems, Ageing and the Stability and Growth Pact

This paper explores how the Stability and Growth Pact may cope with the future costs of population ageing in the European Union. Clearly, population ageing has forced countries to reform their pension systems, and will continue to do so, both by reducing the generosity of pension arrangements and by switching to funding rather than relying on pure pay-as-you go pension provision. We study how such reforms affect the room for adhering to the Pact, but also how the Pact may induce or hamper the incentives for reform. In our analysis we will draw on recent literature on the Pact and on the pensions and the ageing problem. We will also calibrate a simple model for addressing intergenerational equity.

Discretionary Fiscal Policy: Review and Estimates for the EU

We briefly review the theoretical and empirical consequences of discretionary fiscal policy changes, after which we provide our own estimates for the EU countries. A fiscal expansion raises output and consumption and reduces the trade balance. Moreover, the stimulating effect of higher government purchases is weaker and the trade balance reduction is larger for more open EU economies, consistent with larger leakage effects. Further direct estimates suggest that fiscal expansions in large EU economies have non-negligible consequences for economic activity in the main trading partners. This provides a rationale for the concerted fiscal expansion recently initiated by the European Commission.

Risk Sharing and Moral Hazard with a Stability Pact

We show how a stability pact based on deficit sanctions eliminates the exacerbation of debt accumulation that may arise from monetary unification. Moreover, by making sanctions contingent upon the economic situation of countries, the stability pact provides for risk sharing. Differences in initial debt levels, however, reduce the scope for unanimous support for a pact. We introduce also endogenous „fiscal discipline“ whose unobservability leads to moral hazard in its provision. If countries are ex ante identical, it is nevertheless optimal to make sanctions at least to some extent contingent on countries’ economic situation. However, with cross-country differences in the costs of providing discipline, some countries may oppose such contingency.