Lesson 10B — Population Ageing, Monetary Policy & External Effects

Does ageing require frequent monetary policy adjustments?

Not directly. Ageing is slow-moving, while monetary policy acts in the short run. Ageing shapes the environment MP operates in.

Why is price stability crucial in ageing economies?

Elderly hold large asset wealth; inflation affects asset values and retirement adequacy.

What is the Inflation Vulnerability Index?

A measure of how inflation impacts an individual's assets/liabilities; index=0 means fully insulated.

Does ageing cause deflation?

Sometimes. Lower aggregate demand can create deflationary pressure (e.g., Japan), but not universal.

How does ageing affect portfolio choice?

Older cohorts become more risk-averse, shifting from equities to safe assets like government bonds.

Why may monetary policy become less effective in ageing societies?

Heavy bond-holding reduces sensitivity to interest rate changes; MP may require stronger adjustments.

What alternative tools become more important with ageing?

Macroprudential tools such as debt servicing ratios and property market constraints.

How does ageing affect aggregate savings?

Ageing reduces private and public savings due to dissaving and higher healthcare/transfer spending.

How does ageing affect investment?

Lower labour supply and demand reduce investment, but human capital investment may rise.

How does ageing likely affect real interest rates?

Empirical evidence suggests ageing → lower real interest rates. If I (needed loans)>S (fundable loans), then lower rates

What forces push real interest rates downward with ageing?

Bequest motives, longer life expectancy, precautionary savings, higher risk aversion.

How does ageing influence labour flows?

Labour flows from younger to older economies relieve shortages in ageing societies.

How does ageing affect capital flows?

Capital tends to flow from low-return ageing economies to higher-return younger economies.

What determines whether capital flows benefit ageing economies?

Financial development and risk premia in destination countries.

How should ageing affect the current account?

Expected to shrink CA surpluses due to lower savings.

What is the Japan current account puzzle?

Japan maintains stable CA surpluses despite ageing because both savings and investment fell proportionally.