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 use a rich model of human capital investment, public health insurance, pensions, private savings, and intra-family transfers to support the consumption of young and elderly dependents. 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. However income per capita remains lower even in the long run because of a reduction in female labor supply, savings, and schooling. Higher fertility in China is therefore unlikely to offset the negative macroeconomic effects of population aging