Population Aging and International Monetary Transmission

This paper shows, using a three-country life-cycle model, that a contractionary U.S. monetary policy shock has weaker effects on output in an old country than in a young country. In response to the shock, despite a larger fall in consumption in the old country, investment there decreases by less and net exports rise by more, which enables output in the old country to decline by less. I then empirically show that the shock brings about a smaller fall in output and a greater rise in net exports in old countries using VARs, and that the shock leads to a larger fall in consumption and a smaller decrease in investment in old countries using the local projection method. The stronger incentives to save in the old country due to the longer life expectancy play a key role in generating these results.