By Central Bank News
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).
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.