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The Baby Boom and the Stock Market Boom

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  • Kyung-Mook Lim
  • David N. Weil

Abstract

This paper addresses two issues. The first is whether demographic change was plausibly responsible for the run-up in stock prices over the last decade, and whether an attempt by the baby boom cohort to cash out of its investments in the period 2010-2030 might lead to an "asset meltdown". The second issue is whether the rise in dependency that will accompany the retirement of the baby-boom cohort calls for an increase in national saving. We analyze these issues using a forward-looking macro-demographic model, and show that they are related via the existence of installation costs for capital. If such costs are sufficiently large, then demographics do have the power to affect stock prices, but "saving for America's old age" is less optimal. However, conventional estimates of capital installation costs are not large enough to explain large stock price movements in response to actual demographic change. Copyright The editors of the "Scandinavian Journal of Economics", 2003 .

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Bibliographic Info

Article provided by Wiley Blackwell in its journal The Scandinavian Journal of Economics.

Volume (Year): 105 (2003)
Issue (Month): 3 (09)
Pages: 359-378

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Handle: RePEc:bla:scandj:v:105:y:2003:i:3:p:359-378

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  1. Andrew B. Abel & Olivier J. Blanchard, 1982. "An Intertemporal Model of Saving and Investment," NBER Working Papers 0885, National Bureau of Economic Research, Inc.
  2. Andrew B. Abel, 2002. "The effects of a baby boom on stock prices and capital accumulation in the presence of Social Security," Working Papers 03-2, Federal Reserve Bank of Philadelphia.
  3. Hubbard, R Glenn & Kashyap, Anil K, 1992. "Internal Net Worth and the Investment Process: An Application to U.S. Agriculture," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(3), pages 506-34, June.
  4. Barry Bosworth & Gary Burtless, 1997. "Social Security reform in a global context," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 41(Jun), pages 243-274.
  5. Weil, David N., 1993. "The economics of population aging," Handbook of Population and Family Economics, Elsevier, in: M. R. Rosenzweig & Stark, O. (ed.), Handbook of Population and Family Economics, edition 1, volume 1, chapter 17, pages 967-1014 Elsevier.
  6. Oliner, Stephen & Rudebusch, Glenn & Sichel, Daniel, 1995. "New and Old Models of Business Investment: A Comparison of Forecasting Performance," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 27(3), pages 806-26, August.
  7. Mankiw, N. Gregory & Weil, David N., 1989. "The baby boom, the baby bust, and the housing market," Regional Science and Urban Economics, Elsevier, vol. 19(2), pages 235-258, May.
  8. Bakshi, Gurdip S & Chen, Zhiwu, 1994. "Baby Boom, Population Aging, and Capital Markets," The Journal of Business, University of Chicago Press, vol. 67(2), pages 165-202, April.
  9. Andrew B. Abel, 2001. "Will bequests attenuate the predicted meltdown in stock prices when baby boomers retire?," Working Papers 01-2, Federal Reserve Bank of Philadelphia.
  10. James M. Poterba, 2001. "Demographic Structure And Asset Returns," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 565-584, November.
  11. Cutler, D.M. & Poterba, J.M. & Sheiner, L.M. & Summers, L.H., 1990. "An Aging Society: Opportunity Or Challenge," Working papers 553, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Douglas W. Elmendorf & Louise M. Sheiner, 2000. "Should America Save for Its Old Age? Fiscal Policy, Population Aging, and National Saving," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 57-74, Summer.
  13. repec:fth:harver:1490 is not listed on IDEAS
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Citations

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Cited by:
  1. Heinrich Hock & David N. Weil, 2006. "The Dynamics of the Age Structure, Dependency, and Consumption," NBER Working Papers 12140, National Bureau of Economic Research, Inc.
  2. David N. Weil, 2006. "Population Aging," NBER Working Papers 12147, National Bureau of Economic Research, Inc.
  3. Ross S. Guest & Ian M. McDonald, 2007. "Other-regarding Uzawa Preferences and Living Standard Catch-up," DEGIT Conference Papers c012_034, DEGIT, Dynamics, Economic Growth, and International Trade.
  4. Quamrul H. Ashraf & David N. Weil & Joshua Wilde, 2011. "The Effect of Interventions to Reduce Fertility on Economic Growth," Working Papers 2011-14, Brown University, Department of Economics.
  5. Dongchul Cho, 2005. "Interest Rate, Inflation, and Housing Price: With an Emphasis on Chonsei Price in Korea," NBER Working Papers 11054, National Bureau of Economic Research, Inc.
  6. Attanasio Orazio P. & Kitao Sagiri & Violante Giovanni L., 2006. "Quantifying the Effects of the Demographic Transition in Developing Economies," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 6(1), pages 1-44, April.
  7. Hans Fehr & Sabine Jokisch, 2006. "Demographischer Wandel und internationale Finanzmärkte," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 7(4), pages 501-517, November.
  8. Robert F. Martin, 2005. "The baby boom: predictability in house prices and interest rates," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 847, Board of Governors of the Federal Reserve System (U.S.).
  9. James M. Poterba, 2004. "The impact of population aging on financial markets," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, Federal Reserve Bank of Kansas City, issue Aug, pages 163-216.
  10. Mukesh Chawla & Gordon Betcherman & Arup Banerji, 2007. "From Red to Gray : The "Third Transition" of Aging Populations in Eastern Europe and the Former Soviet Union," World Bank Publications, The World Bank, number 6741, October.
  11. Kuttner, Kenneth & Posen, Adam, 2011. "How flexible can inflation targeting be and still work?," Discussion Papers, Monetary Policy Committee Unit, Bank of England 34, Monetary Policy Committee Unit, Bank of England.
  12. Junning Cai, 2004. "Baby Boom, Asset Market Meltdown and Liquidity Trap," Macroeconomics, EconWPA 0401002, EconWPA.

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