This thesis comprises three chapters on fiscal sustainability, focusing on ageing society. Chapter 1 discusses the assessment of fiscal sustainability, while Chapter 2 and 3 explore fiscal policy measure aimed at improving it.
Chapter 1 evaluates fiscal sustainability using three separate approaches: (1)undertaking an econometric test of the PVBC based on the series of debt, deficit and other macro variables pertinent to fiscal policies as Campbell (1987) test; (2)regressing the primary surplus on debt to estimate a Bohn (2005) rule and (3) measuring the required adjustment in a fiscal tool to achieve a given debt target in the medium-term, the so-called Blanchard (1990) medium-term debt dynamics. Chapter 1 conducts the empirical analysis through the length of a unified VAR model that incorporates demographic change. The combined empirical evidence suggests that fiscal policies in most countries have been on an unsustainable path since 2008.
In Chapter 2, I use a transformed VAR model to analyse the response required by the Bohn (2005) rule to converge the Blanchard (1990) medium-term debt dynamics to zero. The results suggest that major economies should strengthen their responses to rising debt ratios and the responses lies within the range of previous significant response bands. Nonetheless, the reliability of the counterfactual results is challenged by the Lucas (1976) critique.
In Chapter 3, I use a large-scale OLG model calibrated to China and compare two steady states (2020 vs 2100). Exogenous variation in the labour tax rate yields an inverted-U “debt Laffer effect” and model-implied debt limits (fiscal space) in each steady state. Sustainability is assessed by comparing these limits with the sustainable debt ratio implied by the Bohn (2005) rule. The implied sustainable debt ratio is 72.38\%, well below the debt limits in both steady states, indicating sustainability after ageing. However, ageing tightens fiscal space, so feasibility typically requires a higher labour tax rate in 2100.
