The Agenda

Monetary Policy in Aging Societies

Neil Irwin points us to a new working paper by Patrick Imam which purports to explain why monetary policy hasn’t proven more expensive in aging market democracies:

To start with, monetary policy works by changing the cost of borrowed money. When growth is weak, a central bank cuts interest rates, which in turn makes spending, consumption, and investment more attractive. You’re more likely to buy a house or a car if the interest rate is 3 percent than if it’s 5 percent, for example. But crucially, the use of borrowed money is a crucial way that these lower rates translate into higher economic growth.

Yet young people are more likely to borrow than old people, as they are investing in increasing their earning potential, etc. So an older society will include fewer people actively using credit products than a younger one. Imam concludes by making several observations, including the following:

1. Because older households have larger asset holdings on average, they are likely to be more inflation-averse, as they have more to lose from unexpected inflation. 

2. But if monetary policy is less effective in older societies, it might have to be more aggressive to yield results.

On a tangential note, a 2006 CRS analysis projected that the old-age dependency ratio (the ratio of the population aged 65 years or over to the population aged 20-64) for the U.S. would increase from 21.2 in 2011 to 34.3 in 2029. The UN’s population division projects that the U.S. old-age dependency ratio will be above 50 by 2100. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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