Abstract
This study investigates the effect of fertility on financial stability and its determinant particularly therelevance of demographic changes. This is motivated by the huge impact of demographic changes(increasing ageing population and low fertility level). Population ageing and low fertility tend to lowerboth labour- force participation and saving rates (change bank business model), thereby raising concernson a future slowing economic growth and financial instability. The system GMM results show that thefertility level somehow acts as a buffer and reflects to the degree of stability to the financial system. Anincrease in fertility and old-age population will contribute to lowering the financial stability. As a matterof policy implication, the nations, financial sectors, and economies should take pro-active active stepsand enhance policies in handling the inter-related issue of the ageing population, decreasing fertility, andfinancial stability especially in developed countries, but not necessarily to overlook the impact of theissues in developing countries.
 Keywords: Demographic change, old-age population, fertility, financial stability
Highlights
Since the late 1990s, research on demographic change has gained significant attention from economists and researchers
Our study revealed that financial stability was influenced negatively and significantly by fertility choices
Low fertility level translates to fewer children; in the coming years, this causes the number of dependency populations to be lesser than the young-adult population
Summary
Since the late 1990s, research on demographic change has gained significant attention from economists and researchers. On the liability side of the banks’ balance sheet, the old-age population favours the development of new long-term saving product which demands households to first save up to retirements and turn to dissaving In this case, many governments have been observed to provide tax incentives and subsidies to raise the conversion of longterm savings into annuities at retirement age (Chikada et al, 2012; Fanti & Spataro, 2013; Bielecki et al, 2015). Demographic changes can influence the bank’s long-term interest rates by flattening the yield curve This negatively affects banking profit by decreasing revenue from liquidity and duration transformation by affecting interest margins over fixed costs. Based on the previous literature which is still lacking, another question arises in our study; does fertility matter to financial stability?
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