Local Shocks and Regional Dynamics in an Aging Economy

Abstract

ABSTRACT This paper studies how population aging shapes regional adjustment to local shocks. I develop a dynamic spatial general equilibrium model that incorporates aggregate demographic change, life‐cycle variation in migration and employment choices, and forward‐looking investment in local capital. Applying the model to Japan, I find that aging can mitigate welfare losses from a negative local shock. Although older populations are less mobile, reduced outmigration sustains local capital demand and slows capital disinvestment, limiting declines in labor productivity. An extension illustrates the model's use for post‐disaster policy evaluation, highlighting a potential tradeoff between spatial equity and aggregate welfare.