Demography, stock prices and interest rates: The Easterlin hypothesis revisited
AbstractDuring the twentieth century, the U.S. witnessed a cyclical birth rate. This in turn shaped the evolution of the ratio of middle-age to young adults, or MY ratio, which captures the stance of the population pyramid at any given time. In this paper, I study the effects of demographic change, as measured by the MY ratio, on stock prices and interest rates. I construct an equilibrium model in the spirit of Geanakoplos et al. (2004). The model relates the economic fortune of a cohort to its relative size (Easterlin hypothesis) and matches qualitatively the long-run trends in real interest rates and stock prices in the U.S. postwar era. The first prediction of the model is that the price-earnings ratio and stock prices should be in phase with the MY ratio. The second prediction is that real interest rates should move inversely with the MY ratio, except after the peak in the MY ratio. Unlike Geanakoplos et al. (2004), this model does not predict that stock prices should move inversely with real interest rates. On the contrary, this model shows that in a stationary cyclic equilibrium there may be independent movements in stock and bond prices, which are necessary to prevent arbitrage opportunities.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Banco Central de Reserva del Perú in its series Working Papers with number 2010-012.
Date of creation: Sep 2010
Date of revision:
Overlapping generations; age structure; habits; consumption socialization;
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robin Brooks, 2002. "Asset-Market Effects of the Baby Boom and Social-Security Reform," American Economic Review, American Economic Association, vol. 92(2), pages 402-406, May.
- Felix Kubler & Karl Schmedders, 2010. "Uniqueness of Steady States in Models with Overlapping Generations," Journal of the European Economic Association, MIT Press, vol. 8(2-3), pages 635-644, 04-05.
- John Geanakoplos & Michael Magill & Martine Quinzii, 2002.
"Demography and the Long-run Predictability of the Stock Market,"
Cowles Foundation Discussion Papers
1380R, Cowles Foundation for Research in Economics, Yale University, revised Jul 2004.
- Author-Name: John Geanakoplos & Michael Magill & Martine Quinzii, 2004. "Demography and the Long-Run Predictability of the Stock Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(1), pages 241-326.
- John Geanakoplos & Michael Magill & Martine Quinzii, 2002. "Demography and the Long-run Predictability of the Stock Market," Cowles Foundation Discussion Papers 1380, Cowles Foundation for Research in Economics, Yale University.
- Kubler, Felix & Schmedders, Karl, 2010.
"Competitive equilibria in semi-algebraic economies,"
Journal of Economic Theory,
Elsevier, vol. 145(1), pages 301-330, January.
- Felix Kuber & Karl Schmedders, 2007. "Competitive Equilibria in Semi-Algebraic Economies," PIER Working Paper Archive 07-013, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- Azariadis, Costas & Guesnerie, Roger, 1986. "Sunspots and Cycles," Review of Economic Studies, Wiley Blackwell, vol. 53(5), pages 725-37, October.
- Ulrike Malmendier & Stefan Nagel, 2009.
"Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?,"
NBER Working Papers
14813, National Bureau of Economic Research, Inc.
- Ulrike Malmendier & Stefan Nagel, 2011. "Depression Babies: Do Macroeconomic Experiences Affect Risk Taking?," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 373-416.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Research Unit).
If references are entirely missing, you can add them using this form.