Macroeconomic analysis of the child benefit: Fertility, demographic structure, and welfare

Abstract

This paper examines the macroeconomic and welfare effects of the child benefit, using a general equilibrium overlapping generations model incorporating fertility choices. The model is calibrated to Japan and produces the benefit elasticity of fertility in line with the empirical estimates. Expanding the per-child payment leads to welfare gains for future generations in the long-run equilibrium. Notably, the long-run gains extend to individuals who are childless throughout their lives and do not receive child benefits. Higher fertility rates facilitated by the expansion and the resulting demographic change account for the results via several channels. However, reaching the new equilibrium takes approximately 100 years as the demographic change necessitates sufficient transition periods. The accrual of welfare gains is thus gradual and takes a long time.