Abstract:
Advanced economies face two important trends: population aging and rising debt.
In the coming years, it will be critical to understand how policies undertaken by
governments interact with their changing age structures. In a panel of advanced
economies, I show that fiscal deficit consolidation multipliers are highly sensitive to
changes in population age. The demographic transmission of fiscal shocks differs
between spending cuts and tax hikes, with important variation within working age and
across dependent groups. Tax increases lead to weaker output response in relatively
young economies, strengthening as population weights move to middle age, and falling
again with large shares of retirees. Output response to spending, on the other hand,
shows little change with demographics. The transmission of both policies to fiscal
deficits suggests significant age dependence, with important impacts on multipliers
when constructed as the ratio of cumulative output and deficit effects. Projecting
forward, my estimates expect smaller multipliers as the baby boomer cohort fully retires,
with demographics accommodating both tax and spending consolidations in terms of
stronger deficit improvements, with tax policy displaying weaker output response.
Abstract:
What determines the strength of the relationship between money growth rate and
inflation? A large literature suggests that it has weakened since the 1980s, without a
definitive explanation of the cause. In this paper, I explore the extent that population
age structure explains changes in the pass through of money growth rates to inflation. I
first show that the quantity theory of money holds over long time horizons in a long
run annual panel of countries, with substantial effects of money growth rates in the
shorter-to-medium term. I then estimate state dependent local projections at five year
horizons, showing that various measures of population age structure have significant
effects on the strength of the money growth-inflation relationship. These demographics
can account for a substantial increase in the effect of money on prices in the 1970s, as
well as a subsequent decline throughout the great moderation. I find that the baby
boomer generation, now in the age group around retirement, are applying upward
pressure on this relationship again, with ambiguous effects in the future as low fertility
and rising longevity continue to play a role.
with Alan M. Taylor
Abstract:
Population aging has been linked to a global savings glut and a decline in safe real
interest rates. Conversely, risky real returns have not fallen as much, if at all, with equity
risk premia on the rise. An existing literature can explain changes in safe rates using
demographics. We go further to account for divergent returns on different assets as well
as the underlying surge in the wealth-income ratio and its asset composition. Empirical
evidence from historical panel data shows that demographic shifts are correlated with
asset returns and risk premia. We build a heterogeneous agent life-cycle model with two
assets (a safe bond and equity) and with aggregate risk. Aging demographics can help
to simultaneously explain three key trends: the rising wealth-income ratio, the falling
risk free rate, and an increasing risk premium. The shifts exert less pressure on risky
returns as high-wealth elderly reallocate away from equities: aging makes retirement
saving a "crowded trade" but more so for bonds. Projecting our model to 2050, aging
pushes the safe rate below zero, but the risk premium remains elevated, as post-boomer
demographics push asset returns to unprecedented and persistently low levels.
Abstract:
The rate of new business startups has fallen drastically over the last thirty-five
years, a trend that accelerated after the year 2000. Other measures of business
dynamism, such as the job reallocation rate, are consistent with this trend. This
has raised serious concern, given the effect that young, high-growth firms have been
shown to have on employment, and may also have on innovation and growth. The
timing of this decline coincides with the start of a steady increase in both the life expectancy and average age of the workforce. I document that an individual's propen-
sity to select into entrepreneurship follows a 'hump shape' as they age. To account
for both individual behavior and aggregate trends, I construct a life cycle model of
entrepreneurial choice, studying a number of channels that link demographic forces
to entrepreneurial selection. I find that demographic channels can account for a
large portion of the recent decline in startup activity. This model predicts that
entrepreneurial activity will continue to decline as the pool of potential entrepreneurs
continue to age. I conclude with a discussion of the potential policy tools that will affect
individual's life cycle risk attitudes and the predicted effects that such measures
will have on the rate of new business startups.
Abstract:
The currency union effect on trade has been a contentious topic, with a wide range of estimates on the true size of gains.
One fundamental issue underlying many estimates is the lack of a accurate control group against which to compare outcomes, making
it hard to understand the degree to which makes existing estimates even harder to interpret from the perspective of policy makers.
Estimates of gains within the eurozone tend to be smaller, while the sovereign debt crisis in Europe caused many to question the long
term viability of the union. It is crucial for the public debate over the costs and benefits of eurozone membership to bring more clarity
to our understanding of the benefits from trade that such a union provides to its members. I propose a novel approach to this literature
that applies inverse propensity score weighting as well as local projections to study both the traditional static estimates of trade as well
as forecasts of the effect of currency unions on trade over time. I find that the static effect of currency unions on trade are in general still
quite large for currency unions in general, but quite small for the emu. However, I find the puzzling result that the currency union effect on trade
for the euro declined over the period from implementation until the recession in 2008. Since the expected effect should be fixed over time this suggests
a deeper understanding of the simultaneous policy changes that take place over the period that may bias static effects upwards.