Discussion Paper Series 2022-E-15

Why Aging Induces Deflation and Secular Stagnation

R. Anton Braun, Daisuke Ikeda

We provide a quantitative theory of deflation and secular stagnation. In our lifecycle framework an aging population puts persistent downward pressure on the price level, real interest rates, and output. A novel feature of our theory is that it also recognizes the reactions of government policy. The central bank responds to falling prices by reducing its policy nominal interest rate and the fiscal authority responds by allowing the public debt-GDP ratio to rise.

Keywords: Aging; Deflation; Lifecycle; Monetary policy; Portfolio choice; Secular stagnation; Tobin effect

Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

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