This paper evaluates the general-equilibrium effects of escape clauses within fiscal rules in an economy subject to business-cycle fluctuations. It embeds an AR(1) total factor productivity (TFP) supply shock into a closed-economy overlapping generations (OLG) model to conduct a 70-year transition-path analysis by incorporating Statistics Korea’s projections of annual changes in population age structure and mortality. To ensure high predictive accuracy while capturing annual demographic shifts, the model employs a Krusell·Smith (1998)-type linear approximation for aggregate forecasting functions, estimated and applied on a year-to-year basis.

The escape clause is modeled as a rule that adjusts the fiscal deficit-to-GDP ratio across three TFP states. In the absence of population aging, the escape clause reduces tax volatility but increases government debt volatility. The higher debt, through crowding-out effects, raises volatility in aggregate capital and GDP, potentially amplifying the persistence of tax shocks. By contrast, the volatility of aggregate assets is mitigated in part: in booms, the escape clause increases debt, which lowers interest rates via crowding out and partially offsets asset accumulation; in recessions, the mechanism cushions against asset declines. When incorporating population aging, overall macroeconomic volatility rises, and the escape clause further magnifies fluctuations in government debt, aggregate capital, and GDP. These findings suggest that under supply shocks, fiscal easing should be limited to targeted support for vulnerable households, with escape clauses gradually narrowed as aging intensifies.

Abstract (ENG)
Preface
Summary (KOR)

Contents

Chapter 1. Introduction

Chapter 2. Current Status of Fiscal Rule Discussions in Korea
　Section 1. Attempts to Introduce Fiscal Rules
　Section 2. Fiscal Path under Korea’s Fiscal Rules

Chapter 3. General Equilibrium Model Setup

Chapter 4. Results of the Model Analysis
　Section 1. Basic Analytical Framework
　Section 2. Analysis of an Economy with a Stable Population
　Section 3. Analysis of an Economy under Population Aging
　Section 4. Policy Implications

Chapter 5. Conclusion

References
Appendix