The Macroeconomic Impact of Fertility Changes in an Aging Population∗

We assess the impact of continued low fertility in China, versus a rebound in fertility due to the relaxation of the one child policy, on demographic and macroeconomic outcomes in a dynamic general equilibrium framework. We build a rich model of household dynamics with young and elderly dependents, human capital investment, public health insurance, pensions, private savings, and intrafamily transfers. Both the model steady state and transitions are calibrated using aggregate and micro level data for China. We find that in short run (sixty years in our benchmark experiment), income per capita is lower with a fertility rebound due primarily to a higher youth dependency rate. In the long run, higher fertility leads to a reduction in the old-age dependency ratio and lowers the tax rate required to pay for old-age pensions and health care. On the other hand, higher fertility also results in a reduction in female labor supply, savings, and educational attainment, affecting output adversely. Our results suggest that higher fertility in China is unlikely to offset the negative macroeconomic effects of population aging in the short-run and potentially could have negative long-run effects as well. JEL classifications: E62, H55, I13, J11, J13