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Interest rate effects of demographic changes in a New-Keynesian life-cycle framework

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  • Kara, Engin
  • von Thadden, Leopold

Abstract

This paper develops a small-scale DSGE model which embeds a demographic structure within a monetary policy framework. We extend the tractable, though non-monetary overlapping-generations model of Gertler (1999) and present a small synthesis model which combines the set-up of Gertler with a New-Keynesian structure, implying that the short-run dynamics related to monetary policy are similar to the paradigm summarized in Woodford (2003). In sum, the model offers a New-Keynesian platform which can be used to investigate in a closed economy set-up the response of macroeconomic variables to demographic shocks, similar to technology, government spending or monetary policy shocks. Empirically, we use a calibrated version of the model to discuss a number of macroeconomic scenarios for the euro area with a horizon of around 20 years. The main finding is that demographic changes, while contributing slowly over time to a decline in the equilibrium interest rate, are not visible enough within the time horizon relevant for monetary policy-making to require monetary policy reactions. JEL Classification: D58, E21, E50, E63

Suggested Citation

  • Kara, Engin & von Thadden, Leopold, 2010. "Interest rate effects of demographic changes in a New-Keynesian life-cycle framework," Working Paper Series 1273, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20101273
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    File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1273.pdf
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    References listed on IDEAS

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    1. Börsch-Supan, Axel & Ludwig, Alexander & Winter, Joachim, 2004. "Aging, Pension Reform, and Capital Flows:," Sonderforschungsbereich 504 Publications 04-65, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
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    Cited by:

    1. Castro, Gabriela & Maria, José R. & Félix, Ricardo Mourinho & Braz, Cláudia Rodrigues, 2017. "Aging And Fiscal Sustainability In A Small Euro Area Economy," Macroeconomic Dynamics, Cambridge University Press, vol. 21(07), pages 1673-1705, October.
    2. Juan F. Jimeno, 2015. "Long-lasting consequences of the European crisis," Working Papers 1522, Banco de España;Working Papers Homepage.
    3. Eric M. Leeper, 2015. "Fiscal Analysis is Darned Hard," NBER Working Papers 21822, National Bureau of Economic Research, Inc.
    4. Stefano Neri & Andrea Gerali, 2017. "Natural rates across the Atlantic," Temi di discussione (Economic working papers) 1140, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    Demographic change; DSGE modelling; monetary policy;

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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