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Population ageing and inflation with endogenous money creation

Listed author(s):
  • Igor Fedotenkov

    ()

    (Bank of Lithuania)

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.

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Paper provided by Bank of Lithuania in its series Bank of Lithuania Working Paper Series with number 23.

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Length: 34 pages
Date of creation: 23 Feb 2016
Handle: RePEc:lie:wpaper:23
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Bank of Lithuania Gedimino pr. 6, LT-01103 Vilnius, Lithuania

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