Demographic Effects on the Impact of Monetary Policy
We study whether the effects of monetary policy are dependent on the demographic structure of the population. We exploit cross-sectional variation in the response of US states to an identified monetary policy shock. We find that there are three distinct age groups. In response to an increase in interest rates, the responses of private employment and personal income are weaker the greater the share of population under 35 years of age, are stronger the greater the share between 40 and 65 years of age, and are relatively unaffected by the share older than 65 years. We find that all age groups become more responsive to monetary policy shocks when the proportion of middle aged increases. We provide evidence consistent with middle aged entrepreneurs starting and expanding businesses in response to an expansionary monetary shock.
We would like to thank V.V. Chari, Jordi Gali, Simon Gilchrist, Christopher House, Pablo Ottonello, Lasse Pedersen, Morton Ravn, Nick Sly, Chris Waller, Jonathan Willis, and Arlene Wong for helpful comments and discussions, and Jessica Meadows and Amanda West for valuable research assistance. Portions of this paper were completed while Dr. Thapar was visiting the Federal Reserve Bank of Kansas City as part of CSWEP’s Summer Economic Fellows Program. We are grateful to the National Science Foundation for their support under grant SES-1919362. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.