From the Federal Reserve Bank of Atlanta's Macroblog, August 4:
It is widely recognized that demographics can have broad and consequential implications for factors including the neutral rate of interest, potential output growth, and transmission of monetary policy (see, for example, here, here, and here) by affecting households' decisions about consumption and savings over their life cycle (see here and here). As the size and the composition of the age distribution change slowly, demographic projections are readily available (see here) and can be used to elicit valuable information about the low-frequency dynamics of key latent variables that guide monetary policy as well as asset valuations (see here and here) and inflation (see here).
This Macroblog post highlights some recent evidence on demographics as a low-frequency driver of trend inflation. This evidence suggests that—in addition to the overall aging of the population—the demographic effect on inflation depends crucially on the composition of the age distribution—that is, whether the effect is disinflationary or inflationary depends on how saving behavior varies across age cohorts as the population ages. To quantify these effects, I revisit and extend the empirical framework of Juselius and Takáts (2015, 2018) (and for more comprehensive analysis, see Goodhart and Pradhan, 2020). I consider annual data for 22 advanced economies (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States) for the period 1960–2024. The data are obtained from the OECD database for demographic variables and CPI (year-over-year) inflation rates, with complementary data for real GDP per capita and missing observations for inflation from the World Bank's World Development Indicators.
I start by examining how a commonly used summary statistic of the age distribution—the dependency ratio, defined as (100 times) the number of people aged 19 and less and people aged 65 or older, relative to the number of people of working age (20 to 64 years old)—co-moves with the inflation rate. Figure 1 plots these two variables for Sweden—for which this co-movement is particularly pronounced—as well as their cross-sectional averages across the 22 countries. Although the inflation rate is volatile, the dependency ratio is very smooth and persistent. Note, however, that the dependency ratio is essentially serving as a low-frequency filter for inflation and is tightly correlated with the corresponding low-frequency component of inflation. But the graph with averaged data (the right plot in figure 1) also suggests that for the majority of countries, including the United States, the dependency ratio tends to lead inflation. It is important to emphasize, at this point, that the potential effect of demographic structure on inflation reflects secular forces that may only amplify or dampen the prevalent sources of (dis)inflationary pressure such as monetary and fiscal policy, as well as commodity or geopolitical shocks, among others....
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Also at Macroblog, September 29:
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