A shrinking and
ageing workforce in many advanced economies will create inflationary pressures
and may make it more difficult for banks to retain deposits and thus cut their
high loan ratios, according to a working paper issued by the Bank for International
Settlements (BIS).
The paper, "Ageing, property prices and money demand" looks at the impact on property prices,
inflation and money from the entry and exit into the workforce of the postwar
baby boomer generation.
Baby boomers saved
by investing in property, boosting house prices and money supply. But now they
are starting to retire, authors Kiyohiko Nishimura and Elod Takats, conclude that monetary policy will have
to take ageing into account.
“Our results have
far-reaching implications for monetary policy. First, the shrinking of working-
age populations in many advanced economies will create inflationary pressures
that will need to be countered,” the study said, adding:
“Second, the
choice of monetary regime might affect property price volatility. In particular,
moves to stabilise prices might also lend stability to property prices during a
demographic transition – a factor relevant for authorities that are considering
the adoption of an inflation targeting regime.
“Third, ageing
will reduce broad money demand, especially in rapidly ageing Europe and
advanced Asia. Thus, ageing might hinder banks in their efforts to collect
deposits and hence bring down excessively high loan-to-deposit ratios."
The paper adds the caveat that demographic changes take place over the long run and the effect can
be overshadowed by other factors, for example the ongoing financial crises,
which has raised the demand for safe assets, providing a strong incentive for
continued precautionary saving.
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