The impact of population ageing on the effectiveness of monetary policy

Abstract

I study the impact of population ageing on the effectiveness of monetary policy. As the world’s population is growing older with an unprecedented pace, central banks should have a great interest in how does the impact of monetary policy on heterogeneous worker and pensioner households differ, and how does the increasing life expectancy alter the ability of central banks to influence the real economy. I study the topic in OLG framework, which I calibrate to match the demographic change in Finland. I find that an interest rate shock has an asymmetrical impact on workers and pensioners and that the population ageing increases this asymmetry even further. My findings suggest that the demographic change weakens the aggregate impact of monetary policy and the ability of central banks to influence the real economy.