Hostname: page-component-cd9895bd7-jn8rn Total loading time: 0 Render date: 2024-12-26T12:46:11.236Z Has data issue: false hasContentIssue false
  • English
  • Français

INTEREST RATE EFFECTS OF DEMOGRAPHIC CHANGES IN A NEW KEYNESIAN LIFE-CYCLE FRAMEWORK

Published online by Cambridge University Press:  14 July 2014

Engin Kara  and
Leopold von Thadden
Engin Kara*
Affiliation:
University of Bristol
Leopold von Thadden
Affiliation:
European Central Bank and University of Mainz
*
Address correspondence to: Engin Kara, Department of Economics, University of Bristol, 8 Woodland Road, Bristol BS8 1TH, UK; e-mail: engin.kara@bristol.ac.uk.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper develops a small-scale DSGE model that embeds a demographic structure within a monetary policy framework. We extend the nonmonetary overlapping-generations model of Gertler and present a small synthesis model that combines the setup of Gertler with a New Keynesian structure, implying that the short-run dynamics related to monetary policy can be compared with that of the standard New Keynesian model. In sum, the model offers a New Keynesian platform that can be used to characterize the response of macroeconomic variables to demographic shocks, similarly to the responses to technology or monetary policy shocks. We offer such characterizations for flexible and sticky price equilibria. Empirically, we calibrate the model to demographic developments projected for the euro area. The main finding is that the projected slowdown in population growth and the increase in longevity contribute slowly over time to a decline in the equilibrium interest rate.

Keywords

Demographic ChangeMonetary PolicyDSGE Modeling
Type
Articles
Information
Macroeconomic Dynamics , Volume 20 , Issue 1 , January 2016 , pp. 120 - 164
Copyright
Copyright © Cambridge University Press 2014 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Altissimo, F., Ehrmann, M., and Smets, F. (2006) Inflation Persistence and Price-Setting Behaviour in the Euro Area. ECB occasional paper 46.Google Scholar
Auerbach, A. and Kotlikoff, L. (1987) Dynamic Fiscal Policy. Cambridge, UK: Cambridge University Press.Google Scholar
Batini, N., Callen, T., and McKibbin, W. (2006) The Global Impact of Demographic Change. IMF working paper 06/09.Google Scholar
Bean, C. (2004) Global Demographic Change: Some Implications for Central Banks. Overview panel, FRB Kansas City Annual Symposium, Jackson Hole, WY.Google Scholar
Blanchard, O. (1985) Debt, deficits, and finite horizons. Journal of Political Economy 93, 223–247.CrossRefGoogle Scholar
Börsch-Supan, A., Ludwig, A., and Winter, J. (2006) Aging, pension reform and capital flows: A multi-country model. Economica 73, 625–658.CrossRefGoogle Scholar
Calvo, G. (1983) Staggered prices in a utility-maximizing framework. Journal of Monetary Economics 12, 983–998.CrossRefGoogle Scholar
Clarida, R., Gali, J., and Gertler, M. (1999) The science of monetary policy: A New Keynesian perspective. Journal of Economic Literature 37, 1661–1707.CrossRefGoogle Scholar
Dixit, A. and Stiglitz, J. (1977) Monopolistic competition and optimum product diversity. American Economic Review 67, 297–308.Google Scholar
Epstein, L. and Zin, S. (1989) Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework. Econometrica 57, 937–968.CrossRefGoogle Scholar
European Economy (2006) The Impact of Ageing on Public Expenditure: Projections for the EU25 Member States on Pensions, Health Care, Long-Term Care, Education and Unemployment Transfers. Special report 1, European Economy. Available at ec.europa.eu/economy_finance/publications/eespecialreports_en.htm.Google Scholar
European Economy (2009) The 2009 Ageing Report: Economic and Budgetary Projections for the EU-27 Member States (2008–2060). Special report 2 plus separate statistical annex, joint report prepared by the European Commission (DG ECFIN) and the Economic Policy Committee (AWG). Available at ec.europa.eu/economy_finance/publications/publication_summary14911_en.htm.Google Scholar
Farmer, R. (1990) RINCE preferences. Quarterly Journal of Economics 105, 43–60.CrossRefGoogle Scholar
Ferrero, A. (2010) A structural decomposition of the U.S. trade balance: Productivity, demographics and fiscal policy. Journal of Monetary Economics 57, 478–490.CrossRefGoogle Scholar
Fujiwara, I. and Teranishi, Y. (2008) A dynamic New Keynesian life-cycle model: Societal aging, demographics, and monetary policy. Journal of Economic Dynamics and Control 32, 2398–2427.CrossRefGoogle Scholar
Gali, J., López-Salido, J., and Vallés, J. (2004) Rule of thumb consumers and the design of interest rate rules. Journal of Money, Credit and Banking 36, 739–764.CrossRefGoogle Scholar
Gertler, M. (1999) Government Debt and Social Security in a Life-Cycle Economy. Carnegie Rochester Conference Series on Public Policy, 61–110.CrossRefGoogle Scholar
INGENUE (2001) Macroeconomic Consequences of Pension Reforms in Europe: An Investigation with the INGENUE World Model. CEPII working paper 17.Google Scholar
Kara, E. and vonAAAAThadden, L. (2010) Interest Rate Effects of Demographic Changes in a New-Keynesian Life-Cycle Framework. ECB working paper 1273.CrossRefGoogle Scholar
Kilponen, J., Kinnunen, H., and Ripatti, A. (2006) Demographic Uncertainty and Labour Market Imperfections in a Small Open Economy. Bank of Finland working paper.Google Scholar
Krueger, D. and Ludwig, A. (2007) On the consequences of demographic change for returns to capital, and the distribution of wealth and welfare. Journal of Monetary Economics 54, 49–87.CrossRefGoogle Scholar
Leeper, E. (1991) Equilibria under “active” and “passive” monetary and fiscal policies. Journal of Monetary Economics 27, 129–147.CrossRefGoogle Scholar
Leith, C. and vonAAAAThadden, L. (2008) Monetary and fiscal policy interactions in a New Keynesian model with capital accumulation and non-Ricardian consumers. Journal of Economic Theory 140, 279–313.CrossRefGoogle Scholar
Maddaloni, A., Musso, A., Rother, P., Ward-Warmedinger, M., and Westermann, T. (2006) Macroeconomic Implications of Demographic Developments in the Euro Area. European Central Bank occasional paper 51.CrossRefGoogle Scholar
Miles, D. (1999) Modelling the impact of demographic change upon the economy. Economic Journal 109, 1–36.CrossRefGoogle Scholar
Miles, D. (2002) Should monetary policy be different in a greyer world? In Auerbach, A. and Herrmann, H. (eds.), Ageing, Financial Markets and Monetary Policy, pp. 243–276. Berlin: Springer.CrossRefGoogle Scholar
Mitchell, P., Sault, J., and Wallis, K. (2000) Fiscal policy rules in macroeconomic models: Principles and practice. Economic Modelling 17, 171–193.CrossRefGoogle Scholar
Ripatti, A. (2008) “A dynamic New Keynesian life-cycle model: Societal aging, demographics, and monetary policy,” by Ippei Fujiwara and Yuki Teranishi. A comment. Journal of Economic Dynamics and Control 32, 2507–2511.CrossRefGoogle Scholar
Roeger, W. (2005) Assessing the Macroeconomic and Budgetary Impacts of Systemic Pension Reforms in the EU. Mimeo, European Commission.Google Scholar
Schmitt-Grohé, S. and Uribe, M. (2007) Optimal simple and implementable monetary and fiscal rules. Journal of Monetary Economics 54, 1702–1725.CrossRefGoogle Scholar
Weil, P. (1989) Overlapping families of infinitely-lived agents. Journal of Public Economics 38, 183–198.CrossRefGoogle Scholar
Woodford, M. (2003) Interest and Prices. Princeton, NJ: Princeton University Press.Google Scholar