More Gray, More Volatile? Aging and (Optimal) Monetary Policy
Dániel Baksa and
Zsuzsa Munkacsi ()
No 58, Dynare Working Papers from CEPREMAP
The empirical and theoretical evidence on the impact of population aging on inflation is mixed, and there is no evidence regarding the volatility of inflation. Using advanced economies’ data and a DSGE-OLG model - a multi-period general equilibrium framework with overlapping generations - we find that aging leads to downward pressure on inflation and higher inflation volatility. Our paper shows how aging affects the short-term cyclical behavior of the economy and the transmission channels of monetary policy. We also examine the interplay between aging and optimal central bank policies. As aging redistributes wealth among generations, generations behave differently, and the labor force becomes more scarce. Our model suggests that aging makes monetary policy less effective, and aggregate demand less elastic to changes in the interest rate. Moreover, in grayer societies, central banks should react more strongly to nominal variables to compensate for higher inflation volatility.
Keywords: aging; monetary policy transmission; optimal monetary policy; inflation targeting (search for similar items in EconPapers)
JEL-codes: E31 E52 J11 (search for similar items in EconPapers)
Pages: 51 pages
New Economics Papers: this item is included in nep-age, nep-dem, nep-dge, nep-mac and nep-mon
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Working Paper: More Gray, More Volatile? Aging and (Optimal) Monetary Policy (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:cpm:dynare:058
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