Age Structure and Monetary Policy Transmission: Conventional vs. Unconventional Shocks in the Euro Area

This paper studies how demographic composition influences the effectiveness of conventional and unconventional monetary policy in the Euro area between 2000 and 2019. Using panel local projections with instrumental variables (PLP-IV), we estimate impulse responses to both types of monetary shocks, identifying their effects on inflation, GDP, and unemployment. A conventional monetary tightening (proxied by a 1-point increase in the Eonia rate) leads to peak reductions of 2 percentage points in inflation and 3 in GDP, with a peak increase in unemployment of 1 point. Unconventional monetary tightening (captured by a synthetic indicator of 2-year government bond yields) produces qualitatively similar effects, though with smaller impacts on inflation and GDP and a slightly larger effect on unemployment. We find that monetary policy effectiveness depends significantly on age structure: in the full EA19 sample, both policies are most effective when the population share aged 45–69 is larger. However, when restricting the sample to the original EA11 countries, the effects shift toward younger cohorts (30–44). These results are robust to fiscal controls and income inequality measures, and underscore the importance of demographic composition in shaping monetary policy transmission.