Generational War on Inflation: Optimal Inflation Rates for the Young and the Old

Ippei Fujiwara, Shunsuke Hori and Yuichiro Waki

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: How does a grayer society affect the political decision making regarding inflation rates? Is deflation preferred as society ages? In order to answer these questions, we compute the optimal inflation rates for the young and the old respectively and explore how they change with demographic factors, by using a New Keynesian model with overlapping generations. According to our simulation results, there indeed exists a tension between the young and the old on the optimal inflation rates. The optimal inflation rates are different between the young and the old. Also, they can be significantly different from zero, in particular, when heterogeneous impacts from inflation via nominal asset holdings are considered. The optimal inflation rates for the old can be largely negative, reflecting their positive nominal asset holdings as well as lower effective discount factor. Societal aging may exert downward pressure on inflation rates through a politico-economic mechanism.

Pages: 35 pages
Date: 2019-03
New Economics Papers: this item is included in nep-age, nep-dge, nep-mac, nep-mon and nep-pol
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Citations: View citations in EconPapers (3)

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Working Paper: Generational War on Inflation: Optimal Inflation Rates for the Young and the Old (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eti:dpaper:19021

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