CEPAR

You are here

Home » Publications » Working Papers

Working Papers

2020Apr
Federal Budget
Transitioning from JobKeeper

Bruce Chapman and John Piggott

Abstract: The JobKeeper scheme aims to provide financial assistance to those in danger of being laid off, and to assist business to stay afloat until more familiar economic and employment activity resumes. In financial terms, it is very significant: relative to population and GDP, it is the largest wage-subsidy scheme in the world. A critical issue, not so far addressed in public discussion, is how the initiative might be phased out when the economy recovers, in a way that facilitates the survival of business while at the same time minimising further fiscal outlays, and avoiding continuing to subsidise businesses that may not in normal times be viable.

This short paper addresses the question of how the JobKeeper program might be wound down at the end of its full subsidy term.

Keywords: Jobkeeper, debt model, COVID-19, policy structure, financial assistance

 

Download
2020Apr
Policy Dialogue
Demographic Change, Carbon Convergence and Climate Policy

Weifeng Liu

Abstract: Per capita carbon emissions are an important concept in international negotiations of climate policies and also in future projections of aggregate carbon emissions. This paper argues that the convergence studies on per capita carbon emissions in the literature are theoretically biased because demographic structure is not considered. The paper therefore links demographic change to carbon convergence analysis and examines historical convergence of per capita carbon emissions for a global sample of countries over the period of 1960-2014. The results show that although demographic structure does not change the existence of carbon convergence, the growth of worker shares is significant in most estimations in this paper, and it also affects the estimates of the convergence speed. The time period of empirical analysis also matters for the convergence results. The paper further extends the IPAT identity by introducing demographic structure as well as economic and energy structure, and argues that the convergence of per capita carbon emissions depends on the convergence of each component, and each component may converge within different time horizons. The paper proposes that emissions rights should be allocated across countries based on a mix of long-term, medium-term and short-term rules.

Keywords: Demographic change, carbon emissions, climate change, convergence analysis, IPAT

 

 

Download
2020Apr
Australian currency
Macroeconomic Impacts of Global Demographic Change on Australia

Weifeng Liu and Warwick McKibbin

Abstract: The world will experience dramatic demographic change over this century. This paper examines the impacts of this global demographic change on the Australian economy at both the aggregate and sectoral levels in a global multi-region and multi-sector general equilibrium model. Using a detailed structural model, we simulate demographic shocks of six regions in the world economy as well as Australian own demographic shock to investigate their impacts on Australian macroeconomic conditions, economic structure and trade patterns. The results suggest that demographic change in different regions of the world economy will have different impacts on sectors in Australia depending on trade patterns between Australia and other regions and also between other regions. The energy, mining and durable manufacturing sectors in Australia are the most affected. Demographic change in China, Japan and Korea has significant negative impacts on Australia, but partly offsetting these shocks are positive demographic shocks from emerging Asia. The overall impact of the rest of the world on Australian GDP is quantitatively negligible, but the impacts on the real interest rate and trade balances are significant. Global demographic change increases Australian real interest rates in the next two decades on the assumption that emerging countries can access global capital markets and take advantage of their demographic dividends.

Keywords: Global demographic change, Australian economy, international trade, international capital flows, DSGE, CGE, heterogeneous agents, G-Cubed

 

Download
2020Apr
Global Macroeconomic Impacts of Demographic Change

Weifeng Liu and Warwick McKibbin

Abstract: The world has been experiencing dramatic demographic change since the 1950s, with almost all countries facing ageing challenges this coming century. However, the timing and speed of this demographic transition are significantly asymmetric across countries. This paper examines the impacts of global demographic change on macroeconomic conditions, international trade, and capital flows in major economies in a global multi-region and multi-sector general equilibrium model. We separately simulate demographic shocks in six regions of the world economy to understand how each shock individually affects the world economy and then combine these shocks to obtain the consequences of global demographic change. The paper finds that future demographic change will have significant impacts on each region’s GDP, which will change the landscape of the world economy. However, the spillover effects on GDP across countries are relatively small. In young economies such as emerging Asia and Africa, while economic growth will significantly benefit from demographic dividends, demographic change does not improve per capita GDP. In ageing economies such as Japan and Europe, population ageing will decrease the real interest rate. However, this impact will be offset by rising interest rates in young economies. Due to the differential real interest rates, capital will flow from more ageing to less ageing economies. These capital flows can be substantial and beneficial for all economies.

Keywords: Global demographic change, consumption, investment, international capital flows, international trade, current account balances, DSGE, CGE, heterogeneous agents, G-Cubed

Download
2020Apr
Demographic Impacts on Life Cycle Portfolios and Financial Market Structures

Weifeng Liu and Phitawat Poonpolkul

Abstract: This paper provides a framework to endogenize rates of return for risk-free bonds and risky capital in an overlapping generation model. The rate of return on capital is endogenized by introducing idiosyncratic production shocks to avoid computation challenges associated with aggregate production shocks in the literature. The framework enables the interaction between financial markets and macroeconomic conditions in a production economy. Based on this framework, the paper first examines life-cycle portfolio choice without demographic change, and illustrates that several factors such as borrowing costs, labor income and production risk play important roles in life-cycle portfolios. The paper then investigates the impacts of population aging on macroeconomic conditions, life-cycle behaviors and financial market structures. The results show that population aging leads to higher capital-labor ratios, and reduces the rates of return on both assets. The bond market shrinks significantly, and capital decreases if the fertility rate declines but increases if the mortality rate declines, leading to structural change in financial markets. The impacts on life-cycle variables are quite different in the fertility and mortality cases particularly at the late stage of life.

Keywords: Demographic change, portfolio choice, financial market structure, risk premium, idiosyncratic production shock, overlapping generation model.

Download
2020Apr
Financial independence
Financial Engineering: A Flexible Longevity Bond to Manage Individual Longevity Risk

Yuxin Zhou, Michael Sherris, Jonathan Ziveyi and Mengyi Xu

Abstract: There is a significant potential demand in many countries around the world for a flexible product to manage individual longevity risk arising from the prevalence of defined contribu- tion pensions, uncertainty in improvements in life expectancy, potential reductions in public pensions and a lack of suitable longevity insurance products. The classical insurance product to manage individual longevity risk is the life annuity. Annuity markets remain thin, driven by many factors including lack of transparency in pricing, high product loadings, bequest motives, lack of liquidity and loss aversion. This paper proposes an individual longevity bond, not currently available, as a combined investment and insurance product to allow individuals to flexibly manage their longevity risk. The bond is a post-retirement product that combines a lifetime income along with a flexible death benefit to meet bequest and liquidity needs. The longevity bonds are issued through a special purpose vehicle which is fully collateralized with a fixed interest portfolio. We apply financial and actuarial models and techniques that provide transparent pricing for interest rate and mortality risk, the construction of optimally immunized bond portfolios and the determination of a loading and solvency margin for systematic longevity risk. We also quantify the natural hedging benefits of the individual bond cash flows arising from the flexible inclusion of both survival dependent income benefits and mortality dependent bequest benefits payable on death.

Keywords: Longevity risk, stochastic mortality, longevity bond, immunization, natural

 

 

Download
2020Apr
Content pensioners
The impact of expected pensions on consumption: Evidence from China

Wei Zheng, Youji Lyu, Ruo Jia and Katja Hanewald

Abstract: We study how pension participation and expected pension benefits affect the consumption of working-age adults based on a nationally representative dataset from the China Health and Retirement Longitudinal Study during the period 2011–2015. We find that working-age adults covered by the Employees’ Basic Pension, a compulsory public pension scheme for employees in the formal sector, have a consumption rate (total consumption to permanent income) that is 29.9 percentage points higher than those who do not participate in any public pension scheme. However, the Residents’ Basic Pension, a low-benefit voluntary public pension scheme for other residents, only promotes the consumption of working-age adults with a low income. Focusing on pension participants, we find that if working-age adults’ expected replacement rate (expected pension benefits at retirement to permanent income) increases by one percentage point, their consumption rate will increase by three percentage points. Working-age adults who are older, poorer, or live in a rural area increase their consumption more in response to the expected replacement rate. Nondurable consumption is more responsive to the expected replacement rate than durable consumption. Overall, our findings suggest that pension expectations are critical to the consumption decisions of working-age adults and can, therefore, affect total consumption.

Keywords: Pension, Replacement rate, Consumption, Retirement, Aging

Download
2020Apr
The Global Macroeconomic Impacts of COVID-19: Seven Scenarios

Warwick McKibbin and Roshen Fernando

Abstract: The outbreak of coronavirus named COVID-19 has disrupted the Chinese economy and is spreading globally. The evolution of the disease and its economic impact is highly uncertain which makes it difficult for policymakers to formulate an appropriate macroeconomic policy response. In order to better understand possible economic outcomes, this paper explores seven different scenarios of how COVID-19 might evolve in the coming year using a modelling technique developed by Lee and McKibbin (2003) and extended scenarios on macroeconomic outcomes and financial markets in a global hybrid DSGE/CGE general equilibrium model.

The scenarios in this paper demonstrate that even a contained outbreak could significantly impact the global economy in the short run. These scenarios demonstrate the scale of costs that might be avoided by greater investment in public health systems in all economies but particularly in less developed economies where health care systems are less developed and population density is high.

Keywords: Coronavirus, COVID-19, pandemic, infectious diseases, risk, macroeconomics, DSGE, CGE, G-Cubed

Download
2020Mar
Financial independence
Sustainable and Equitable Pensions with Means Testing in Aging Economies (REVISED)

George Kudrna, Chung Tran and Alan Woodland

A means-tested pension system has a distinct feature that tailors the level of pension benefits according to individual status. In the context of population aging with widening gaps in life expectancies, this feature generates an automatic adjustment mechanism that mitigates the pressing fiscal cost of an old-age public pension program (fiscal stabilization device) and redistributes pension benefits to those in need with shorter life expectancies.

Keywords: Population Ageing, Sustainability, Social Security, Means Testing, Redistribution, Automatic Stabilizer, Overlapping Generations, Dynamic General Equilibrium.

Download