Fertility, fiscal deficit and sustainability of public debt in an endogenous growth model

This aim of this study is to construct a model which overlaps generations to clear the effects of fiscal deficit on fertility. The relationship between fiscal deficit and fertility is revealed and the mechanism of fiscal deficit and its effect in reducing fertility is clarified. Empirical evidence shows that an increase in debt-GDP ratio decreases fertility. The model indicates that fiscal deficit has positive and negative effects on fertility through the change of the income tax rate. Numerical simulation shows that an increase in fiscal deficit reduces fertility. Therefore, this result is consistent with the empirical evidence. In addition, this study demonstrates that a steady state would not exist if the child allowance for child-rearing costs exceeds the critical level. This result indicated that an expansion of the child allowance aimed as a countermeasure to the falling birthrate can make the sustainability of public debt unstable. Thus, countermeasures should be formulated to address the falling birthrate depending on the fiscal situation.