Feb. 27 (Bloomberg) -- Aging populations in advanced economies such as the U.S. mute the efficacy of monetary policy, which therefore needs to play a more active role with larger variations in interest rates, according to research from an International Monetary Fund working paper.
“Monetary policy has a bigger impact on young people than it does on the older people,” IMF senior economist Patrick Imam said in an interview.
Given the tendency of older households to have more money, take on less debt and be more risk averse, the impact of monetary policy is increasingly diminished, according to Imam’s paper. By 2030, when all baby boomers will have turned 65, 18 percent of the U.S. population will be at least that age, according to data from the Pew Research Center.
“Given that the whole country becomes older, those channels that affect the older people become more important and those that affect the younger people become less important,” Imam said.
Aging and retired households tend to have paid off the bulk of their credit so they are less sensitive to interest-rate changes, Imam wrote in the March edition of the IMF’s Finance and Development publication.
By contrast, younger societies have a larger portion of consumers taking on debt to finance home purchases and education.
Imam’s observation is rooted in the so-called life-cycle hypothesis, wherein households tend to borrow more when they are young, accumulate assets and pay down loans until they retire, then live off their assets in retirement.
Monetary policy is intended to react to short-term events rather than slow-moving changes such as aging, Imam said, which is one reason economists have not explored the link of its effectiveness to demographics.
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To contact the reporter on this story: Katherine Peralta in Washington at firstname.lastname@example.org