Demographics and other constraints on future monetary policy

Abstract

I present empirical evidence that we are only about two thirds of the way through a multi-decade demographic transition that is pushing down interest rates, as a higher share of the population moves into a high asset holding stage of their life cycle. I also summarise some new research that links debt, income inequality and wealth inequality, which have additional downward effects on interest rates. To address the risk of limited space for future monetary easing in such a low interest rate environment, there are three types of policy available. Changes that enable policy rates to be cut into deeply negative territory; temporarily or permanently higher inflation rates; policies that raise the neutral rate, for example by lowering time spent in retirement, or by lowering income and wealth inequality.