Working Paper: NBER ID: w26324
Authors: John V. Leahy; Aditi Thapar
Abstract: 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.
Keywords: monetary policy; demographics; employment; income
JEL Codes: E32; E52; J11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increase in the share of the population under 35 years (J11) | Weaker responses of private employment and personal income to monetary policy shocks (E39) |
| Increase in the share of the population aged between 40 and 65 years (J11) | Stronger responses of private employment and personal income to monetary policy shocks (E39) |
| Increase in the fraction of 30-34 year-olds (J19) | Reduces the impact of a monetary policy shock (E39) |
| Increase in the fraction of 50-54 year-olds (J19) | Increases the impact of a monetary policy shock (E19) |
| Increase in the number of middle-aged residents (J11) | Increases responsiveness of income and employment across all age groups (E24) |
| Middle-aged individuals (J26) | Amplify the effects of monetary policy (E52) |
| Increased business formation by middle-aged individuals (L26) | Broader economic benefits (F69) |