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Shock from Graying: Are Grandparents Responsible for the Weakening of Monetary Policy Effectiveness?

September 26, 2014 • FINANCE & BANKING, EMERGING TRENDS, Governance & Regulation

By Patrick Imam

Patrick Imam explores how a population with an ageing demographic requires certain monetary policy in order to be effective in the post-crisis era. Factors that will need to be taken into consideration, he argues, include the structural transformation in the credit market, and changes in the way monetary policy affects the expectations of businesses and consumers.

Rising life expectancy rates – thanks to mounting living standards and the application of new technologies – is arguably one of the most remarkable achievements of modern times. Over the last decades, gains in longevity of about two years per decade in advanced economies have been the norm, and there is no inflection in the trend in sight.1 As a result, the world is going through an unprecedented demographic transition.

Successfully managing this structural change is a major challenge for policymakers who are going forward. The consequences of a graying population for government spending and taxation policy has been widely explored and generally agreed upon: a combination of higher taxes; reduced pension benefits; and longer working lives is essential to dealing with the fiscal burden an ageing population imposes – although the political challenges of doing so are enormous.

There has, however, been little exploration of the impact of an ageing population regarding monetary policy; policy involving the process by which authorities influence interest rates to promote stable inflation, employment, and growth.

 
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