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Population ageing and inflation with endogenous money creation

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  • Igor Fedotenkov

    () (Bank of Lithuania)

Abstract

This paper provides an explanation as to why population ageing is associated with deflationary processes. For this reason we create an overlapping-generations model (OLG) with money created by credits (inside money) and intergenerational trade. In other words, we combine a neoclassical OLG model with post-Keynesian monetary theory. The model links demographic factors such as fertility rates and longevity to prices. We show that lower fertility rates lead to smaller demand for credits, and lower money creation, which in turn causes a decline in prices. Changes in longevity affect prices through real savings and the capital market. Furthermore, a few links between interest rates and inflation are addressed; they arise in the general equilibrium and are not thoroughly discussed in literature. Long-run results are derived analytically; short-run dynamics are simulated numerically.

Suggested Citation

  • Igor Fedotenkov, 2016. "Population ageing and inflation with endogenous money creation," Bank of Lithuania Working Paper Series 23, Bank of Lithuania.
  • Handle: RePEc:lie:wpaper:23
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    More about this item

    Keywords

    Population ageing; inflation; OLG model; inside money; credits;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • J10 - Labor and Demographic Economics - - Demographic Economics - - - General

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