Interest rate effects of demographic changes in a New-Keynesian life-cycle framework

Engin Kara and Leopold von Thadden

No 1273, Working Paper Series from European Central Bank

Abstract: This paper develops a small-scale DSGE model which embeds a demographic structure within a monetary policy framework. We extend the tractable, though non-monetary overlapping-generations model of Gertler (1999) and present a small synthesis model which combines the set-up of Gertler with a New-Keynesian structure, implying that the short-run dynamics related to monetary policy are similar to the paradigm summarized in Woodford (2003). In sum, the model offers a New-Keynesian platform which can be used to investigate in a closed economy set-up the response of macroeconomic variables to demographic shocks, similar to technology, government spending or monetary policy shocks. Empirically, we use a calibrated version of the model to discuss a number of macroeconomic scenarios for the euro area with a horizon of around 20 years. The main finding is that demographic changes, while contributing slowly over time to a decline in the equilibrium interest rate, are not visible enough within the time horizon relevant for monetary policy-making to require monetary policy reactions. JEL Classification: D58, E21, E50, E63

Keywords: demographic change; DSGE modelling; monetary policy (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-age, nep-cba, nep-dge and nep-mac
Note: 269717
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Citations: View citations in EconPapers (6)

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Related works:
Journal Article: INTEREST RATE EFFECTS OF DEMOGRAPHIC CHANGES IN A NEW KEYNESIAN LIFE-CYCLE FRAMEWORK (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20101273

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