This paper examines macroeconomic impacts of population aging in
Korea using a computable general equilibrium (CGE) model of Auerbach-
Kotlikoff (AK) type. The conventional AK model is extended in order to
incorporate open economy features and endogenous fertility choices. By
applying this model to the current demographic structure of Korea, we
obtain the following results. First, welfare implications of population aging
are rather complicated, since there are both winners and losers. While
current and future young generations will be harmed by population aging,
current elderly generations benefit from the trend. Second, policy responses
to population aging should be considered with great caution. Fertility
promoting policies, for instance, may entail substantial redistribution of
resources among individuals from current and future generations. Third,
opening up the domestic capital market may be less controversial but a more
effective policy response. By reducing fluctuations in the interest and wage
rates caused by population aging, capital market integration can moderate
welfare variations among different generations.