Birth rates, longevity, and monetary transmission

Abstract

The source of aging matters for the real-rate redistribution channel of monetary transmission in a three-generation life-cycle model. A given old-age dependency ratio can reflect higher longevity or a lower birth rate. We show that this channel depends on the source of aging and on who bears the fiscal cost, not on the ratio alone. When retirees bear a sufficiently large share of the fiscal cost, the low-birth-rate economy has the larger consumption response to a real interest-rate increase. Otherwise, the high-longevity economy has the larger response.