The Impact Of Population Ageing On Monetary Policy – Analysis
Population ageing is likely to affect many areas of life, from pension system sustainability to housing markets. This column shows that monetary policy can be considered another victim. Low fertility rates and increasing life expectancy substantially lower the natural rate of interest. As a consequence, central banks are more likely to hit the lower bound constraint on the nominal interest rate and face long periods of low inflation, especially if they fail to account for the impact of demographic trends on the natural interest rate in real time.
Many countries, developed and developing alike, are experiencing a process of population ageing – fertility rates remain below the level that guarantees the replacement of the population and the average life expectancy at birth keeps increasing. As a consequence, the ratio of the elderly to the working-age population – the old age dependency ratio – has been, and will be, increasing over the upcoming decades. To give some idea on the magnitude of this process, while the ratio of elderly (aged 65 or more) to the working-age population (aged 15-64) in the euro area was around 0.25 at the turn of the 21st century, the proportion is projected to exceed 0.5 by 2050
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