The impact of population aging on business cycles volatility: International evidence

Abstract

• The impact of population aging on labor market dynamics increases output volatility. • Longevity seems to reduce consumption volatility, but the link is less robust. • Older entrepreneurs’ risk aversion and experience likely promote investment stability. The effects of population aging on short-run macroeconomic performance are theoretically ambiguous. Increased longevity may compromise public budgets’ sustainability due to the growing expenditures with health services and social security. It may also affect labor market dynamics and influence savings’ behavior, leading to lower equilibrium interest rates and more restricted monetary policy interventions’ space. Yet, consumers and entrepreneurs become more risk-averse as life expectancy grows, which may reduce the volatility of consumption and investment. This paper aims at verifying if population aging promotes or hinders macroeconomic stability. Using data from 146 economies between 1996 and 2016, static and dynamic panel data models were estimated controlling for other factors that affect short-run macroeconomic performance. The results indicate that countries with an aging population exhibit lower consumption and investment volatility, but output volatility seems to increase as the population grows older likely due to the labor market responses to aging and greater international trade volatility.