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Demographics, Monetary Policy, and the Zero Lower Bound

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  • MARCIN BIELECKI
  • MICHAŁ BRZOZA‐BRZEZINA
  • MARCIN KOLASA

Abstract

We develop a New Keynesian life‐cycle model to assess the importance of population aging for monetary policy. The model successfully matches the age profiles of consumption‐savings decisions made by European households. It implies that demographic trends contribute significantly to the decline of the natural rate of interest (NRI) and potential output growth, and exacerbate the risk of hitting the zero lower bound (ZLB), given the current inflation targets. Under a realistic assumption that the central bank updates its estimates of the NRI only with some lag, aging may additionally lead to a sizable and persistent deflationary bias, elevating the ZLB risk even further.

Suggested Citation

  • Marcin Bielecki & Michał Brzoza‐Brzezina & Marcin Kolasa, 2023. "Demographics, Monetary Policy, and the Zero Lower Bound," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(7), pages 1857-1887, October.
    • Handle: RePEc:wly:jmoncb:v:55:y:2023:i:7:p:1857-1887
    DOI: 10.1111/jmcb.12972
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    Cited by:

    1. Carlo Ciccarelli & Matteo Gomellini & Paolo Sestito, 2019. "Demography and Productivity in the Italian Manufacturing Industry: Yesterday and Today," CEIS Research Paper 457, Tor Vergata University, CEIS, revised 16 May 2019.
    2. Ansgar Rannenberg, 2019. "Inequality, the risk of secular stagnation and the increase in household deb," Working Paper Research 375, National Bank of Belgium.
    3. Leon Podkaminer, 2021. "Dynamic Stochastic General Equilibrium: macroeconomics at a dead end," Bank i Kredyt, Narodowy Bank Polski, vol. 52(2), pages 97-122.
    4. Michele Catalano & Emilia Pezzolla, 2022. "Global natural projections," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 49(4), pages 949-990, November.
    5. Tomas Reichenbachas & Linas Jurkšas & Rokas Kaminskas, 2021. "Natural real rates of interest across Euro area countries: Are R-stars getting closer together?," Bank of Lithuania Discussion Paper Series 24, Bank of Lithuania.
    6. Brand, Claus & Goy, Gavin W & Lemke, Wolfgang, 2020. "Natural rate chimera and bond pricing reality," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224546, Verein für Socialpolitik / German Economic Association.
    7. Kimberly A. Berg & Chadwick C. Curtis & Steven Lugauer & Nelson C. Mark, 2021. "Demographics and Monetary Policy Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(6), pages 1229-1266, September.
    8. Papapetrou, Evangelia & Tsalaporta, Pinelopi, 2020. "The impact of population aging in rich countries: What’s the future?," Journal of Policy Modeling, Elsevier, vol. 42(1), pages 77-95.
    9. Alberto Locarno & Alessandra Locarno, 2021. "Is inflation targeting a strategy past its sell-by date?," Temi di discussione (Economic working papers) 1316, Bank of Italy, Economic Research and International Relations Area.
    10. Lis, Eliza & Nickel, Christiane & Papetti, Andrea, 2020. "Demographics and inflation in the euro area: a two-sector new Keynesian perspective," Working Paper Series 2382, European Central Bank.
    11. Fadejeva, Ludmila & Kantur, Zeynep, 2023. "Wealth distribution and monetary policy," Economic Modelling, Elsevier, vol. 125(C).
    12. Brand, Claus & Bielecki, Marcin & Penalver, Adrian, 2018. "The natural rate of interest: estimates, drivers, and challenges to monetary policy JEL Classification: E52, E43," Occasional Paper Series 217, European Central Bank.
    13. Frank Smets, 2021. "Comment expliquer la faiblesse durable des taux directeurs dans la zone euro ?," Revue d'économie financière, Association d'économie financière, vol. 0(4), pages 47-60.
    14. Marcin Bielecki & Michał Brzoza-Brzezina & Marcin Kolasa, 2022. "Intergenerational Redistributive Effects of Monetary Policy [Price-Level Changes and the Redistribution of Nominal Wealth Across the Euro Area]," Journal of the European Economic Association, European Economic Association, vol. 20(2), pages 549-580.
    15. Brand, Claus & Goy, Gavin W & Lemke, Wolfgang, 2020. "Natural rate chimera and bond pricing reality," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224546, Verein für Socialpolitik / German Economic Association.
    16. Marcin Bielecki & Michał Brzoza-Brzezina & Marcin Kolasa, 2022. "Aging, Migration and Monetary Policy in Poland," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1, pages 5-30.
    17. Papetti, Andrea, 2021. "Demographics and the natural real interest Rate: historical and projected paths for the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 132(C).
    18. Patrik Kupkovic, 2020. "R-star in Transition Economies: Evidence from Slovakia," Working and Discussion Papers WP 3/2020, Research Department, National Bank of Slovakia.
    19. Michał Brzoza-Brzezina & Jacek Suda, 2021. "Are DSGE models irreparably flawed?," Bank i Kredyt, Narodowy Bank Polski, vol. 52(3), pages 227-252.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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