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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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  • Kyung-Mook Lim & David N. Weil, 2003. "The Baby Boom and the Stock Market Boom," Working Papers 2003-07, Brown University, Department of Economics.
  • Handle: RePEc:bro:econwp:2003-07
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    1. Julian L. Simon (ed.), 1997. "The economics of population," Books, Edward Elgar Publishing, volume 0, number 1076.
    2. Hubbard, R Glenn & Kashyap, Anil K, 1992. "Internal Net Worth and the Investment Process: An Application to U.S. Agriculture," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 506-534, June.
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    4. 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.
    5. Mankiw, N. Gregory & Weil, David N., 1989. "The baby boom, the baby bust, and the housing market," Regional Science and Urban Economics, Elsevier, vol. 19(2), pages 235-258, May.
    6. 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.
    7. James M. Poterba, 2001. "Demographic Structure And Asset Returns," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 565-584, November.
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    9. 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.
    10. David M. Cutler & James M. Poterba & Louise M. Sheiner & Lawrence H. Summers, 1990. "An Aging Society: Opportunity or Challenge?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 21(1), pages 1-74.
    11. Oliner, Stephen & Rudebusch, Glenn & Sichel, Daniel, 1995. "New and Old Models of Business Investment: A Comparison of Forecasting Performance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 806-826, August.
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    13. 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.
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    Cited by:

    1. Heinrich Hock & David Weil, 2012. "On the dynamics of the age structure, dependency, and consumption," Journal of Population Economics, Springer;European Society for Population Economics, vol. 25(3), pages 1019-1043, July.
    2. Quamrul H. Ashraf & David N. Weil & Joshua Wilde, 2013. "The Effect of Fertility Reduction on Economic Growth," Population and Development Review, The Population Council, Inc., vol. 39(1), pages 97-130, March.
    3. James M. Poterba, 2004. "The impact of population aging on financial markets," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 163-216.
    4. 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.
    5. David Weil, 2006. "Population Aging," Working Papers 2006-09, Brown University, Department of Economics.
    6. Matthias Doepke & Moshe Hazan & Yishay D. Maoz, 2015. "The Baby Boom and World War II: A Macroeconomic Analysis," Review of Economic Studies, Oxford University Press, vol. 82(3), pages 1031-1073.
    7. repec:eee:hapoch:v1_179 is not listed on IDEAS
    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. 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.
    10. Busl, Claudia & Iliewa, Zwetelina & Jokisch, Sabine & Kappler, Marcus & Roscher, Thomas & Schindler, Felix & Schleer, Frauke, 2012. "Endbericht an das Bundesministerium der Finanzen zum Forschungsauftrag fe 11/11: "Sparen und Investieren vor dem Hintergrund des demografischen Wandels"," ZEW Expertises, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research, number 110554.
    11. Junning Cai, 2004. "Baby Boom, Asset Market Meltdown and Liquidity Trap," Macroeconomics 0401002, EconWPA.
    12. Hans Fehr & Sabine Jokisch, 2006. "Demographischer Wandel und internationale Finanzmärkte," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 7(4), pages 501-517, November.
    13. 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.
    14. 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, June.
    15. Ross S. Guest & Ian M. McDonald, 2010. "Other-Regarding Uzawa Preferences And Living Standard Catch-Up," Pacific Economic Review, Wiley Blackwell, vol. 15(1), pages 87-115, February.

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