IMF Economist: The Elderly May Be Dampening the Impact of Stimulus Efforts

Thursday, 12 Sep 2013 08:08 AM

By John Morgan

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The reason ultra-loose monetary policy by central banks around the world has not packed more of an economic wallop is because of graying populations in rich nations, according to a working paper by International Monetary Fund (IMF) economist Patrick Imam.

"The elderly used to account for a small share of the population, but technological breakthroughs and social changes over the last two centuries have transformed this demographic structure," Imam wrote.

The thrust of Imam's theory is that monetary policy works by changing the cost of borrowed money, but that borrowing money is disproportionately an activity of young people.

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And apparently there just are not enough young people as a share of the overall population in developed nations to really rev up the economic engines.

This is known as the "life-cycle hypothesis" of saving, in which people use different levels of credit during different times of their lives. Thus, young people tend to take out major loans for education and buying homes and cars, but by the time they retire, they have more savings than debt.

The hypothesis implies that in an older society, fewer people are actively using credit products and therefore are less sensitive to interest rate changes.

So, "a central bank turning the dials of interest rates will be less powerful at shaping the speed of the overall economy," The Washington Post noted.

Imam tested his theory by comparing the results of monetary policy by country against each country's demographics. His finding was that a 1 percent increase in the elderly lessens the effectiveness of monetary policy in affecting inflation by 0.1 percentage points and the jobless rate by 0.35 percentage points.

"These estimates thus imply, when taken at face value, quite a strong negative long-run effect of the ageing of the population on the effectiveness of monetary policy," Imam wrote. "This is particularly significant when linked to, for instance, the projected 10-point rise in the old-age dependency ratio in Germany over the next decade."

In his paper, Imam made a few recommendations, as well.

One recommendation is that "monetary policy will have to become more 'activist' in ageing societies, with higher variation in interest rates possible going forward."

Another is that an assortment of policy tools be brought to bear to offset the impact of ageing populations.

"For the last five years, in a time of zero interest rates, [Federal Reserve Chairman] Ben Bernanke and the rest of the Federal Reserve have been scratching their heads trying to figure out how to get more juice out of their interest rate policies in terms of economic growth," The Post noted.

"If Imam’s research holds up to scrutiny, it suggests what they’re fighting isn’t just the normal problems of an economy following a financial crisis, but a longer-term problem in which demographics will make the tools they have less powerful."

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