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Baby Boom, Asset Market Meltdown and Liquidity Trap

  • Junning Cai

    (University of Hawaii at Manoa)

A so-called “asset market meltdown hypothesis” predicts that baby boomers’ large savings will drive asset market booms that will eventually collapse because of the boomers’ large retirement dissavings. As good news to baby boomers, our analysis shows that this meltdown hypothesis is fundamentally flawed; and baby-boom-driven asset market booms may not necessarily collapse. However, bad news is that, in the case where meltdowns are about to happen, forward-looking baby boomers’ attempts to escape them will be futile and may lead the economy into a “liquidity trap”. (JEL E21, E22, E44, G12)

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File URL: http://128.118.178.162/eps/mac/papers/0401/0401002.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0401002.

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Length: 37 pages
Date of creation: 14 Jan 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0401002
Note: Type of Document - PDF; prepared on Win2000; pages: 37; figures: 3
Contact details of provider: Web page: http://128.118.178.162

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  1. Robin Brooks, 2000. "What Will Happen to Financial Markets When the Baby Boomers Retire?," IMF Working Papers 00/18, International Monetary Fund.
  2. Andrew B. Abel, 2003. "The Effects of a Baby Boom on Stock Prices and Capital Accumulation in the Presence of Social Security," Econometrica, Econometric Society, vol. 71(2), pages 551-578, March.
  3. Andrew B. Abel & Janice C. Eberly, . "An Exact Solution for the Investment and Market Value of a Firm Facing Uncertainty, Adjustment Costs, and Irreversibility," Rodney L. White Center for Financial Research Working Papers 12-93, Wharton School Rodney L. White Center for Financial Research.
  4. Andrew B. Abel, 2001. "Will bequests attenuate the predicted meltdown in stock prices when baby boomers retire?," Working Papers 01-2, Federal Reserve Bank of Philadelphia.
  5. James M. Poterba, 2001. "Demographic Structure And Asset Returns," The Review of Economics and Statistics, MIT Press, vol. 83(4), pages 565-584, November.
  6. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-29, June.
  7. Kyung-Mook Lim & David N. Weil, 2003. "The Baby Boom and the Stock Market Boom," Scandinavian Journal of Economics, Wiley Blackwell, vol. 105(3), pages 359-378, 09.
  8. Abel, Andrew B. & Eberly, Janice C., 1997. "An exact solution for the investment and value of a firm facing uncertainty, adjustment costs, and irreversibility," Journal of Economic Dynamics and Control, Elsevier, vol. 21(4-5), pages 831-852, May.
  9. Robin Brooks, 2000. "What Will Happen To Financial Markets When The Baby Boomers Retire?," Computing in Economics and Finance 2000 92, Society for Computational Economics.
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