C.D. Howe report considers age impact on monetary policy
There are many ways in which an aging population is changing the way things are done; healthcare, housing, transportation; but what about monetary policy?
This was the question posed by the C.D. Howe Institute which considered how Canada’s aging population impacts the effectiveness of the Bank of Canada’s policies.
In “Faulty Transmissions: How Demographics Affect Monetary Policy in Canada” authors Steve Ambler and Jeremy Kronick say that the aging population has been a drag on the effectiveness of monetary policy since the financial crisis.
They note that over the past decade, inflation has fallen short of the BoC’s 2% target, averaging 1.5% - and older Canadians may be the reason.
“Canada’s aging population is likely a leading cause of the systematic undershooting of inflation we have seen since the financial crisis,” says Ambler. “Specifically, an aging population that takes on less debt is less sensitive to changes in the interest rate.”
They say that, without the effects of the aging population, the monetary policies of the BoC would have had greater impact.
Lower interest rates fuel consumer spending, but less so for those carrying lower debt, the authors note.
“Credit plays an important role on the real economy – it magnifies the reduction in the effectiveness of monetary policy that comes from an aging population,” Kronick explains. “Because of population aging, lower interest rates have not generated the typical increase in spending, leading to subdued inflation and lower economic growth.”
“If further population aging continues to reduce the effectiveness of monetary policy, this could eventually undermine Canada’s inflation-targeting regime,” Ambler says.
This could mean that the BoC will need to make more significant changes to interest rates and move towards more unconventional policies.
