Population Aging and the Aggregate Effects of Monetary Policy

Abstract

This paper studies the effects of monetary policy on the expenditure of households of different ages using micro data from the U.S. Consumer Expenditure Survey. I find that contractionary monetary policy shocks reduce the expenditure of young households by significantly more than older households. Households react asymmetrically in part because young households tend to have lower savings and higher labor market risk. This implies that the age composition of the population affects the setting of optimal monetary policy in response to aggregate shocks. Counter-factual analysis suggests that the projected population aging in the U.S. will dampen the pass-through of monetary policy to the economy.