Baby Busts and Baby Booms: The Fertility Response to Shocks in Dynastic Models

After the fall in fertility during the demographic transition, many developed countries experienced a baby bust, followed by the baby boom and subsequently a return to low fertility (BBB event). Demographers have linked these large fluctuations in fertility to the series of ‘economic shocks’ that occurred with similar timing – the Great Depression, World War II (WWII), the economic expansion that followed and then the productivity slow down of the 1970s. This paper formalizes a more general link between fluctuations in output and fertility decisions, in simple versions of stochastic growth models with endogenous fertility. First, we develop initial tools to address the effects of ‘temporary’ shocks to productivity on fertility choices. Second, we analyze calibrated versions of these models. Qualitatively, results show that under reasonable parameter values fertility is pro-cyclical. Moreover, following a deviation in fertility (due to a productivity shock, for example) sets off an endogenous cycle even if productivity is on trend thereafter. Using the U.S. BBB event as a laboratory, we find that the elasticity of fertility to shocks lays between 1 and 1.7, while the elasticity to fertility deviations is about -0.9. Depending on the nature of child costs, the model captures between 35 and 62 percent of the pre-WWII baby bust due to the great depression, while endogenous fluctuations in conjunction with the productivity boom in the 1950s and 1960s captures between 48 and 93 percent of the post-WWII baby boom. ∗* University of Minnesota and Federal Reserve Bank of Minneapolis, ** University of Southampton. The authors thank the National Science Foundation for financial support. We also thank Michele Boldrin, Henry Siu and participants at SITE 2005 Conference on The Household Nexus and the Macroeconomy for helpful comments.