The Aging-Inflation Puzzle: on the Interplay between Aging, Inflation and Pension Systems

Duarte Semedo Leite and Klaus Härtl

VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy from Verein für Socialpolitik / German Economic Association

Abstract: This paper focuses on the empirically observed relationship between demographic change and inflation and explores the theoretical nature of the puzzling link between the two. It puts the existent disparate empirical findings in the literature into perspective by formalizing an overlappinggenerations (OLG) model containing many of the underlying mechanisms that link demographic change and inflation dynamics. We are the first to formally disentangle the two components of demographic change: population size and structure, and determine how they separately affect inflation. We find that changes in population size are a main driver of inflationary pressures, but changes in population structure play a fundamental role in dampening or boosting inflationary dynamics since size effects are quite stable across the several scenarios tested. The main conclusions show a negative effect of demographic change/aging on inflation. We also conclude that the introduction of a public pay-as-you-go (PAYG) pension system has a negative impact on inflation, but these effects are dampened under general equilibrium conditions and when individuals can respond to changes in their income by adapting their labor supply. A simulation of different stages of demographic change and size of pension systems is carried out for a selected sample of individual countries. Findings suggest that aging countries with generous PAYG pension systems face strong deflationary pressures while countries that face aging but with higher fertility and immigration rates, such as the US, will experience the same deflationary pressures but much later in time. These results reinforce the hypotheses that we are entering a period of stagnation and they warn policy makers about the impact of demographic change on the foreseeable effects of monetary policy.

Keywords: Population aging; inflation; life-cycle behavior; pension systems; labor supply; money (search for similar items in EconPapers)
JEL-codes: C68 D15 E27 E31 J11 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-age, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/203514/1/VfS-2019-pid-26283.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc19:203514

Access Statistics for this paper

More papers in VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy from Verein für Socialpolitik / German Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().