Demographic forecasts and fiscal policy rules

• Published in: International journal of forecasting Vol. 30; no. 4; pp. 1098 - 1109
• Main Authors: Lassila, Jukka, Valkonen, Tarmo, Alho, Juha M.
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.10.2014; Elsevier Sequoia S.A
• Subjects: Changing demographic forecasts; Demographics; Economic models; Fiscal policy; Fiscal sustainability; Forecasting techniques; Population; Public finance; Stochastic models; Stochastic population simulations; Studies; Finland; Changing demographic forecasts; Stochastic population simulations; Public finance; Fiscal sustainability
• ISSN: 0169-2070; 1872-8200
• DOI: 10.1016/j.ijforecast.2014.02.009

All quantitative evaluations of fiscal sustainability that include the effects of population ageing must utilize demographic forecasts. It is well known that such forecasts are uncertain, and some studies have taken that into account by using stochastic population projections jointly with economic models. We develop this approach further by introducing regular demographic forecast revisions that are embedded in stochastic population projections. This allows us to separate, for each demographic outcome and under different policy rules, the expected and realized effects of population ageing on public finances. In our Finnish application, demographic uncertainty produces a considerable sustainability risk. We consider policies that reduce the likelihood of getting highly indebted and demonstrate that, although demographic forecasts are uncertain, they contain enough information to be useful in forward-looking policy rules.