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A Quantitative Assessment of the Impact of Deflation in an Aging Economy

Author

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  • Takemasa Oda

    (Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Japan Center for Economic Research, E-mail: takemasa.oda@jcer.or.jp))

Abstract

This paper quantitatively evaluates the long-run effects of changes in inflation on the real economy, with a focus on deflation and population aging in Japan. It develops an overlapping generations model that incorporates household demand for safe assets. The model features two channels through which a decline in inflation affects the real economy in the long run, that is, the Mundell-Tobin effect and the redistribution effect. Calibrated to the Japanese economy, the model shows that a decline in inflation does more damage to young households and impairs capital accumulation, thus reducing output and social welfare, and moreover, that the damage can be magnified by population aging. This result could provide a certain rationale for central banks to pursue and maintain a positive rate of inflation in an aging economy.

Suggested Citation

  • Takemasa Oda, 2024. "A Quantitative Assessment of the Impact of Deflation in an Aging Economy," IMES Discussion Paper Series 24-E-14, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:24-e-14
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    File URL: https://www.imes.boj.or.jp/research/papers/english/24-E-14.pdf
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    More about this item

    Keywords

    Demographics; life cycle; deflation; Mundell-Tobin effect; redistribution; overlapping generations model;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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