Population Aging, Retirement, and the Effectiveness of Monetary Policy on Inflation

Abstract

I document a new channel through which a demographic shift toward an older society reduces the effectiveness of monetary policy in influencing inflation: As the share of older workers increases, their larger labor supply elasticities — especially among those nearing retirement — flatten the aggregate labor supply curve, dampening the impact of demand shocks on wages and consumer prices. The present article provides empirical evidence that this channel operates in practice. First, in response to expansionary monetary policy shocks, the labor force participation rate of older workers increases significantly, while that of the younger generation does not. Second, the wage Phillips curve is flatter for older adults. Third, in economies with more advanced population aging, consumer prices respond less, while output tends to change more following monetary shocks.

Keywords: Population aging, Retirement, Monetary policy, Inflation JEL Classification: E24, E32, E52