Population Aging and International Monetary Transmission

This paper examines whether U.S. monetary policy has different effects on young and old countries. I first empirically show that a contractionary U.S. monetary policy shock brings about a smaller fall in output and a greater rise in net exports in old countries using vector autoregressions (VARs), and that the shock leads to a larger fall in consumption and a smaller decrease in investment in old countries using the local projection method. I then construct a three‐country life‐cycle model including the U.S., a young country, and an old country. Consistent with the empirical analyses, the simulation results of the model show that a contractionary U.S. monetary policy shock has weaker effects on output in the old country than in the young country. In response to the shock, despite a larger fall in consumption in the old country, investment there decreases by less and net exports rise by more, which enables output in the old country to decline by less. The stronger incentives to save in the old country, resulting from the longer life expectancy and hence the longer retirement period, play a key role in generating these results.