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The Baby Boom and the Stock Market Boom

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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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Paper provided by Brown University, Department of Economics in its series Working Papers with number 2003-07.

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Date of creation: 2003
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Handle: RePEc:bro:econwp:2003-07

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Postal: Department of Economics, Brown University, Providence, RI 02912

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  1. Stephen Oliner & Glenn Rudebusch & Daniel Sichel, 1993. "New and old models of business investment: a comparison of forecasting performance," Working Paper Series / Economic Activity Section 141, Board of Governors of the Federal Reserve System (U.S.).
  2. James M. Poterba, 2001. "Demographic Structure And Asset Returns," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 565-584, November.
  3. Andrew B. Abel, 2003. "The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security," Econometrica, Econometric Society, vol. 71(2), pages 551-578, March.
  4. 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.
  5. N. Gregory Mankiw & David N. Weil, 1988. "The Baby Boom, The Baby Bust, and the Housing Market," NBER Working Papers 2794, National Bureau of Economic Research, Inc.
  6. Abel, Andrew B & Blanchard, Olivier J, 1983. "An Intertemporal Model of Saving and Investment," Econometrica, Econometric Society, vol. 51(3), pages 675-92, May.
  7. 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.
  8. repec:fth:harver:1490 is not listed on IDEAS
  9. R. Glenn Hubbard & Anil Kashyap, 1990. "Internal Net Worth and the Investment Process: An Application to U.S. Agriculture," NBER Working Papers 3339, National Bureau of Economic Research, Inc.
  10. Andrew B. Abel, 2001. "Will Bequests Attenuate The Predicted Meltdown In Stock Prices When Baby Boomers Retire?," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 589-595, November.
  11. 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.
  12. Weil, David N., 1993. "The economics of population aging," Handbook of Population and Family Economics, in: M. R. Rosenzweig & Stark, O. (ed.), Handbook of Population and Family Economics, edition 1, volume 1, chapter 17, pages 967-1014 Elsevier.
  13. 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.
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Cited by:
  1. Kenneth N. Kuttner & Adam S. Posen, 2011. "How Flexible Can Inflation Targeting Be and Still Work?," Working Paper Series WP11-15, Peterson Institute for International Economics.
  2. 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.
  3. Hans Fehr & Sabine Jokisch, 2006. "Demographischer Wandel und internationale Finanzmärkte," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 7(4), pages 501-517, November.
  4. James Poterba, 2004. "The Impact of Population Aging on Financial Markets," NBER Working Papers 10851, National Bureau of Economic Research, Inc.
  5. 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, vol. 6(1), pages 1-44, April.
  6. Quamrul H. Ashraf & David N. Weil & Joshua Wilde, 2011. "The Effect of Interventions to Reduce Fertility on Economic Growth," NBER Working Papers 17377, National Bureau of Economic Research, Inc.
  7. David Weil, 2006. "Population Aging," Working Papers 2006-09, Brown University, Department of Economics.
  8. Robert F. Martin, 2005. "The baby boom: predictability in house prices and interest rates," International Finance Discussion Papers 847, Board of Governors of the Federal Reserve System (U.S.).
  9. Heinrich Hock & David Weil, 2012. "On the dynamics of the age structure, dependency, and consumption," Journal of Population Economics, Springer, vol. 25(3), pages 1019-1043, July.
  10. Junning Cai, 2004. "Baby Boom, Asset Market Meltdown and Liquidity Trap," Macroeconomics 0401002, EconWPA.
  11. 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.
  12. 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.

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