Aging and the Price Level: Irreversible Capital, Demographic Transitions, and the Shifting Phillips Curve

Yongheng Deng, Tomoo Inoue, Kiyohiko Nishimura and Chihiro Shimizu

No DP26-3, RCESR Discussion Paper Series from Research Center for Economic and Social Risks, Institute of Economic Research, Hitotsubashi University

Abstract: Why have the world's most rapidly aging economies experienced decades of low inflation followed by emerging supply-side price pressures? We propose a mechanism based on the interaction between demographic change and the irreversibility of physical capital. In a three-generation overlapping-generations model with Calvo pricing and irreversible investment (Ii ≥ 0), durable capital built during the demographic bonus period cannot be rapidly scrapped when population declines, creating a prolonged overhang of productive capacity relative to demand. As depreciation gradually erodes this overhang and the labor force continues to shrink, the economy eventually transitions from structural excess supply to a supply-constrained regime. Reduced-form evidence from 38 economies over 1965- 2019 is consistent with the model's predictions: aging is associated with lower inflation, the Phillips curve slope declines with the elderly share, and countries that experienced migration-driven population reversals exhibit more stable slopes-patterns that the irreversibility mechanism can account for. We interpret the negative Phillips curve slope estimated for Japan after 2015 as suggestive of the onset of the supply-constrained phase, though causal identification remains an important limitation of the international panel design.

Keywords: population aging; inflation; irreversible investment; overlapping generations; supply constraints; international panel data (search for similar items in EconPapers)
JEL-codes: E22 E31 E52 J11 O41 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2026-03
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