Will Bequests Attenuate the Predicted Meltdown in Stock Prices When Baby Boomers Retire?

18 Pages Posted: 15 Feb 2001 Last revised: 21 Sep 2022

See all articles by Andrew B. Abel

Andrew B. Abel

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

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Date Written: February 2001

Abstract

Jim Poterba finds that consumers do not spend all of their assets during retirement, and he projects that the demand for assets will remain high when the baby boomers retire. Based on his forecast of continued high demand for capital, Poterba rejects the asset market meltdown hypothesis, which predicts a fall in stock prices when the baby boomers retire. I develop a rational expectations general equilibrium model with a bequest motive and an aggegate supply curve for capital. In this model, a baby boom generates an increase in stock prices, and stock prices are rationally anticipated to fall when the baby boomers retire, even though, as emphasized by Poterba, consumers do not spend all of their assets during retirement. This finding contradicts Poterba's conclusion that continued high demand for assets by retired baby boomers will prevent a fall in the price of capital.

Suggested Citation

Abel, Andrew B., Will Bequests Attenuate the Predicted Meltdown in Stock Prices When Baby Boomers Retire? (February 2001). NBER Working Paper No. w8131, Available at SSRN: https://ssrn.com/abstract=260544

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