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The effects of education and aging in an OLG model: long-run growth in France, Germany and Italy

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Abstract

The purpose of the paper is to provide a long-run analysis up to 2050 of the interplay between financial integration, diverging labor productivity, and the aging process in the larger European countries. We use the Prometeia overlapping generation model for Italy, Germany, and France which are modeled as open economies in capital markets. Our projections provide a core-periphery structure in which Germany, the most abundant human capital country, shows the highest but a decreasing growth rate due to pronounced aging, and finances capital accumulation processes in France and Italy. We find that financial trends are reversed in the late 2010s when Italy begins to over-save as the gap in human capital endowment, and then in productivity, becomes larger compared to the other two countries. This leads to a reduction in physical capital accumulation and innovation processes in Italy. We employ fiscal experiments to correct the long-run divergent behavior of countries in order to get a more homogeneous growth rate path among countries. We also measure the impact of taxation on net-wealth in Italy, and evaluate the internal and spillover effects.

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Notes

  1. We use Baffigi (2011) for capital stock data. We use ISTAT national account data for GDP and labor partecipation rate.

  2. See Börsch-Supan et al. (2006) for a discussion.

  3. We use genetic algorithm where genes population is the \(TFP^{ex}_t\) to be used to match historical GDP.

  4. Such as in the absence of a voluntary bequest.

  5. In this case we simulate a reduction from 95 to 60 % in 30 years for France.

  6. We recommend to take into account this hypothesis with caution. The myopic behavior hypothesis should postpone the effect on growth as agents in reality should react more slowly.

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Acknowledgments

We thank Paolo Onofri and Stefania Tomasini for their helpful remarks on this line of research and two anonymous referees for their comments.

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Authors and Affiliations

  1. Prometeia Associazione per le previsioni econometriche, Via Marconi 43, 40122, Bologna, Italy

    Michele Catalano & Emilia Pezzolla

Authors
  1. Michele Catalano
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  2. Emilia Pezzolla
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Corresponding author

Correspondence to Michele Catalano.

Appendix

Appendix

See Figs. 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20 and 21.

Fig. 6
figure 6

Model’s fit, simulated versus historical Gdp growth rates

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Fig. 7
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Gdp growth and contribution

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Fig. 8
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Fiscal compact for Italy: public debt consolidation (Solid Germany; Dashed Italy; Dotted France). A Wealth. K Capital stock. N Labor supply

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Fig. 9
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Fiscal compact for Italy: public debt consolidation (Solid Germany; Dashed Italy; Dotted France). R return rate on capital. W wage. b social transfers

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Fig. 10
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Fiscal compact for Italy and France: public debt consolidation (Solid Germany; Dashed Italy; Dotted France). A Wealth. K Capital stock. N Labor supply

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Fig. 11
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Fiscal compact for Italy and France: public debt consolidation (Solid Germany; Dashed Italy; Dotted France). R return rate on capital. W wage. b social transfers

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Fig. 12
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Fiscal compact for Italy and France: public debt consolidation through labor taxation (Solid Germany; Dashed Italy; Dotted France). A Wealth. K Capital stock. N Labor supply

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Fig. 13
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Fiscal compact for Italy and France: public debt consolidation through labor taxation (Solid Germany; Dashed Italy; Dotted France). R return rate on capital. W wage. b social transfers

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Fig. 14
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Wealth taxation on Italy and Public investment: flat scheme taxation (Solid Germany; Dashed Italy; Dotted France). A Wealth. K Capital stock. N Labor supply

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Fig. 15
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Wealth taxation on Italy and public investment: flat scheme taxation (Solid Germany; Dashed Italy; Dotted France). R return rate on capital. W wage. b social transfers

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Fig. 16
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Wealth taxation on Italy and public investment: progressive scheme taxation (Solid Germany; Dashed Italy; Dotted France). A Wealth. K Capital stock. N Labor supply

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Fig. 17
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Wealth taxation on Italy and public investment: Progressive scheme taxation (Solid Germany; Dashed Italy; Dotted France). R return rate on capital. W wage. b social transfers

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Fig. 18
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Wealth Taxation on GIF and public investment (Solid Germany; Dashed Italy; Dotted France). A Wealth. K Capital stock. N Labor supply

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Fig. 19
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Wealth Taxation on GIF and Public investment. R return rate on capital (Solid Germany; Dashed Italy; Dotted France). W wage. b social transfers

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Fig. 20
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Increase in human capital in Italy via decreasing primary surplus (Solid Germany; Dashed Italy; Dotted France). A Wealth. K Capital stock. N Labor supply

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Fig. 21
figure 21

Increase in human capital in Italy via decreasing primary surplus (Solid Germany; Dashed Italy; Dotted France). R return rate on capital. W wage. b social transfers

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Catalano, M., Pezzolla, E. The effects of education and aging in an OLG model: long-run growth in France, Germany and Italy. Empirica 43, 757–800 (2016). https://doi.org/10.1007/s10663-016-9351-5

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