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

Ippei Fujiwara, Shunsuke Hori and Yuichiro Waki

No 372, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: How does a grayer society affect the political decision-making regarding inflation rates? Is deflation preferred as a 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, with the optimal inflation rates differing between generations. The rates can be significantly different from zero, particularly, 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.

Keywords: optimal inflation rates; Societal aging; Heterogeneous agents (search for similar items in EconPapers)
JEL-codes: E31 E52 J11 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2019-11-19
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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:fip:feddgw:372

DOI: 10.24149/gwp372

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