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Working Papers

2020May
Policy Dialogue

Michael Keane and Timothy Neal

Abstract: We develop an econometric model of consumer panic (or panic buying) during the COVID-19 pandemic. Using Google search data on relevant keywords, we construct a daily index of consumer panic for 54 countries from January to late April 2020. We also assemble data on government policy announcements and daily COVID-19 cases for all countries. Our panic index reveals widespread consumer panic in most countries, primarily during March, but with significant variation in the timing and severity of panic between countries. Our model implies that both domestic and world virus transmission contribute significantly to consumer panic. But government policy is also important: Internal movement restrictions - whether announced by domestic or foreign governments - generate substantial short run panic that largely vanishes in a week to ten days. Internal movement early in the pandemic generated more panic than those announced later. In contrast, travel restrictions and stimulus announcements had little impact on consumer panic. 

Keywords: Coronavirus, Hoarding, Consumption, Panel Data, Containment Policy 

 

2020May
Aged care support

Shang Wu, Hazel Bateman, Ralph Stevens and Susan Thorp 

Abstract: We study stated preferences for long-term care insurance that pays income instead of reimbursing formal care costs. Our results show that long-term care income insurance is likely to provide two important benefits to aging societies. First, it can facilitate flexible, informal, long-term care - seniors who plan to rely on family members for extensive care find income insurance particularly attractive. Second, it can enhance risk-pooling - if long-term care income insurance were available, many seniors would release funds set aside to self-insure long-term care risk and purchase additional longevity insurance. Our results rule out adverse selection into the long-term care income insurance product on objective risk factors but show both adverse and advantageous selection effects on private information. We conclude that a flexible insurance product that supports informal care has both demand- and supply-side advantages over typical expense-reimbursement cover.

Keywords: Long-term care insurance; aged care; informal care; retirement incomes; annuity demand, online experiment.

2020Apr
Pension finances

James Mahmud Rice, Jeromey B. Temple and Peter F. McDonald

Abstract: Inequality between generations is a central feature of human societies. Moreover, many institutions have developed within human societies that mould and shape intergenerational inequality, including the state. Nevertheless, intergenerational inequality remains ill-defined as a concept and is rarely directly measured empirically. This paper examines intergenerational inequality – in particular, intergenerational inequality in income. In order to provide greater definition to the concept of intergenerational inequality, the paper introduces a new measure of intergenerational inequality: the IGI index. With this new index added to its methodological toolkit, the paper examines the empirical evidence on intergenerational inequality in income, as well as how the state works to alter intergenerational inequality through the redistributive effect of public transfers. The empirical evidence examined is drawn from the recently developed Australian National Transfer Accounts, which include data on the incomes and public transfers paid and received by different ages and generations in Australia during the 28-year time period between 1981–82 and 2009–10. The analyses presented suggest that there are substantial inequalities in the incomes received by different generations, with earlier generations generally receiving less income in real terms over their lifetimes than later generations. As the state has operated through time – receiving public transfers from some individuals and paying public transfers to others – it has worked to increase intergenerational inequality. This implies that the state has worked to decrease the incomes of earlier generations relative to those of later generations. In this way, the state could be described as exhibiting a bias in favour of later generations.

Keywords: Australia, government, income, inequality, intergenerational transfers, life cycle

 

 

2020Apr
Federal Budget

Bruce Chapman and John Piggott

Abstract: The JobKeeper scheme aims to provide financial assistance to those in danger of being laid off, and to assist business to stay afloat until more familiar economic and employment activity resumes. In financial terms, it is very significant: relative to population and GDP, it is the largest wage-subsidy scheme in the world. A critical issue, not so far addressed in public discussion, is how the initiative might be phased out when the economy recovers, in a way that facilitates the survival of business while at the same time minimising further fiscal outlays, and avoiding continuing to subsidise businesses that may not in normal times be viable.

This short paper addresses the question of how the JobKeeper program might be wound down at the end of its full subsidy term.

 

Keywords: Jobkeeper, debt model, COVID-19, policy structure, financial assistance

 

 

2020Apr
Policy Dialogue

Weifeng Liu

Abstract: Per capita carbon emissions are an important concept in international negotiations of climate policies and also in future projections of aggregate carbon emissions. This paper argues that the convergence studies on per capita carbon emissions in the literature are theoretically biased because demographic structure is not considered. The paper therefore links demographic change to carbon convergence analysis and examines historical convergence of per capita carbon emissions for a global sample of countries over the period of 1960-2014. The results show that although demographic structure does not change the existence of carbon convergence, the growth of worker shares is significant in most estimations in this paper, and it also affects the estimates of the convergence speed. The time period of empirical analysis also matters for the convergence results. The paper further extends the IPAT identity by introducing demographic structure as well as economic and energy structure, and argues that the convergence of per capita carbon emissions depends on the convergence of each component, and each component may converge within different time horizons. The paper proposes that emissions rights should be allocated across countries based on a mix of long-term, medium-term and short-term rules.

Keywords: Demographic change, carbon emissions, climate change, convergence analysis, IPAT

 

 

2020Apr
Australian currency

Weifeng Liu and Warwick McKibbin

Abstract: The world will experience dramatic demographic change over this century. This paper examines the impacts of this global demographic change on the Australian economy at both the aggregate and sectoral levels in a global multi-region and multi-sector general equilibrium model. Using a detailed structural model, we simulate demographic shocks of six regions in the world economy as well as Australian own demographic shock to investigate their impacts on Australian macroeconomic conditions, economic structure and trade patterns. The results suggest that demographic change in different regions of the world economy will have different impacts on sectors in Australia depending on trade patterns between Australia and other regions and also between other regions. The energy, mining and durable manufacturing sectors in Australia are the most affected. Demographic change in China, Japan and Korea has significant negative impacts on Australia, but partly offsetting these shocks are positive demographic shocks from emerging Asia. The overall impact of the rest of the world on Australian GDP is quantitatively negligible, but the impacts on the real interest rate and trade balances are significant. Global demographic change increases Australian real interest rates in the next two decades on the assumption that emerging countries can access global capital markets and take advantage of their demographic dividends.

Keywords: Global demographic change, Australian economy, international trade, international capital flows, DSGE, CGE, heterogeneous agents, G-Cubed

 

2020Apr

Weifeng Liu and Warwick McKibbin

Abstract: The world has been experiencing dramatic demographic change since the 1950s, with almost all countries facing ageing challenges this coming century. However, the timing and speed of this demographic transition are significantly asymmetric across countries. This paper examines the impacts of global demographic change on macroeconomic conditions, international trade, and capital flows in major economies in a global multi-region and multi-sector general equilibrium model. We separately simulate demographic shocks in six regions of the world economy to understand how each shock individually affects the world economy and then combine these shocks to obtain the consequences of global demographic change. The paper finds that future demographic change will have significant impacts on each region’s GDP, which will change the landscape of the world economy. However, the spillover effects on GDP across countries are relatively small. In young economies such as emerging Asia and Africa, while economic growth will significantly benefit from demographic dividends, demographic change does not improve per capita GDP. In ageing economies such as Japan and Europe, population ageing will decrease the real interest rate. However, this impact will be offset by rising interest rates in young economies. Due to the differential real interest rates, capital will flow from more ageing to less ageing economies. These capital flows can be substantial and beneficial for all economies.

Keywords: Global demographic change, consumption, investment, international capital flows, international trade, current account balances, DSGE, CGE, heterogeneous agents, G-Cubed

2020Apr

Weifeng Liu and Phitawat Poonpolkul

Abstract: This paper provides a framework to endogenize rates of return for risk-free bonds and risky capital in an overlapping generation model. The rate of return on capital is endogenized by introducing idiosyncratic production shocks to avoid computation challenges associated with aggregate production shocks in the literature. The framework enables the interaction between financial markets and macroeconomic conditions in a production economy. Based on this framework, the paper first examines life-cycle portfolio choice without demographic change, and illustrates that several factors such as borrowing costs, labor income and production risk play important roles in life-cycle portfolios. The paper then investigates the impacts of population aging on macroeconomic conditions, life-cycle behaviors and financial market structures. The results show that population aging leads to higher capital-labor ratios, and reduces the rates of return on both assets. The bond market shrinks significantly, and capital decreases if the fertility rate declines but increases if the mortality rate declines, leading to structural change in financial markets. The impacts on life-cycle variables are quite different in the fertility and mortality cases particularly at the late stage of life.

Keywords: Demographic change, portfolio choice, financial market structure, risk premium, idiosyncratic production shock, overlapping generation model.

2020Apr
Financial independence

Yuxin Zhou, Michael Sherris, Jonathan Ziveyi and Mengyi Xu

Abstract: There is a significant potential demand in many countries around the world for a flexible product to manage individual longevity risk arising from the prevalence of defined contribu- tion pensions, uncertainty in improvements in life expectancy, potential reductions in public pensions and a lack of suitable longevity insurance products. The classical insurance product to manage individual longevity risk is the life annuity. Annuity markets remain thin, driven by many factors including lack of transparency in pricing, high product loadings, bequest motives, lack of liquidity and loss aversion. This paper proposes an individual longevity bond, not currently available, as a combined investment and insurance product to allow individuals to flexibly manage their longevity risk. The bond is a post-retirement product that combines a lifetime income along with a flexible death benefit to meet bequest and liquidity needs. The longevity bonds are issued through a special purpose vehicle which is fully collateralized with a fixed interest portfolio. We apply financial and actuarial models and techniques that provide transparent pricing for interest rate and mortality risk, the construction of optimally immunized bond portfolios and the determination of a loading and solvency margin for systematic longevity risk. We also quantify the natural hedging benefits of the individual bond cash flows arising from the flexible inclusion of both survival dependent income benefits and mortality dependent bequest benefits payable on death.

Keywords: Longevity risk, stochastic mortality, longevity bond, immunization, natural hedging