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Generational War on Inflation: Optimal Inflation Rates for the Young and the Old

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  • FUJIWARA Ippei
  • HORI Shunsuke
  • WAKI Yuichiro

Abstract

How does a grayer society affect the political decision making regarding inflation rates? Is deflation preferred as society ages? In order to answer these questions, we compute the optimal inflation rates for the young and the old respectively and explore how they change with demographic factors, by using a New Keynesian model with overlapping generations. According to our simulation results, there indeed exists a tension between the young and the old on the optimal inflation rates. The optimal inflation rates are different between the young and the old. Also, they can be significantly different from zero, in particular, when heterogeneous impacts from inflation via nominal asset holdings are considered. The optimal inflation rates for the old can be largely negative, reflecting their positive nominal asset holdings as well as lower effective discount factor. Societal aging may exert downward pressure on inflation rates through a politico-economic mechanism.

Suggested Citation

  • FUJIWARA Ippei & HORI Shunsuke & WAKI Yuichiro, 2019. "Generational War on Inflation: Optimal Inflation Rates for the Young and the Old," Discussion papers 19021, Research Institute of Economy, Trade and Industry (RIETI).
  • Handle: RePEc:eti:dpaper:19021
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    References listed on IDEAS

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    1. Bilbiie, Florin O. & Fujiwara, Ippei & Ghironi, Fabio, 2014. "Optimal monetary policy with endogenous entry and product variety," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 1-20.
    2. Antoine Lepetit, 2017. "The Optimal Inflation Rate with Discount Factor Heterogeneity," Working Papers hal-01527816, HAL.
    3. Fujiwara, Ippei & Teranishi, Yuki, 2008. "A dynamic new Keynesian life-cycle model: Societal aging, demographics, and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2398-2427, August.
    4. Katagiri, Mitsuru & Konishi, Hideki & Ueda, Kozo, 2020. "Aging and deflation from a fiscal perspective," Journal of Monetary Economics, Elsevier, vol. 111(C), pages 1-15.
    5. Nils Goernemann & Keith Kuester & Makoto Nakajima, 2016. "Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy," International Finance Discussion Papers 1167, Board of Governors of the Federal Reserve System (U.S.).
    6. Ghironi, Fabio, 2008. "The role of net foreign assets in a New Keynesian small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(6), pages 1780-1811, June.
    7. Eichenbaum, Martin & Rebelo, Sérgio & Wong, Arlene, 2018. "State Dependent Effects of Monetary Policy: the Refinancing Channel," CEPR Discussion Papers 13223, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Donato Masciandaro & Francesco Passarelli, 2020. "Populism, Political Pressure and Central Bank (in)Dependence," Open Economies Review, Springer, vol. 31(3), pages 691-705, July.

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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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