Demographics and ination: A cointegration analysis

Transcription

1 Demographics and ination: A cointegration analysis E. Bobeica, E. Lis, C. Nickel and Y. Sun European Central Bank 1 Prices and Costs Division EEA Geneva August 22, The views expressed here are those of the authors and should not be reported as representing the views of the European Central Bank.

2 Outline 1. Introduction 2. Literature review 3. Cointegration analysis 4. Conclusions

3 Introduction 1 Slow recovery after the Great Recession and since 212 low ination across advanced economies 2 Demography invoked as potentially driving low-frequency ination and being deationary, e.g., in Japan 3 Substantial changes in the demographic structure over the last 4-5 decades

4 Literature review: Links between demographics and ination 1 Disentangling fertility rate and life expectancy eects: Katagari et al. (215) life-cycle savings 2 Population age structure: Juselius and Taktas (216), Yoon et al. (214) secular stagnation 3 Political economy: Bullard et al. (212) and Vlandas (216) voters' preferences 4 Monetary policy: Carvalho and Ferrero (215) real interest rate eects

5 Our contributions We look at changes in working-age population and long-run equilibrium relationship between demography and ination, and provide cross-country evidence.

6 Inflation and demographics (YoY, %) Core inflation Percentage change in working-age population Figure 1: Source: Eurostat, UN Population Statistics ( )

7 Unit root tests

8 Cointegration analysis I Vector error correction model (VECM) representation of the reduced-form VAR(p): Y t = ΦD t + ΠY t 1 + Γ 1 Y t Γ p 1 Y t p+1 + ε t (1) t = 1,..., T D t = deterministic terms Π = Π Π p I n If Π is singular, two cases are possible: 1 rank(π) = : Y t I (1) and not cointegrated 2 rank(π) = r < n: Y t I (1) with r linearly independent co-integrating vectors and n r common stochastic trends

9 Cointegration analysis II Factorization of Π: Π = α β n n n r r n The rows of β form a basis for the r cointegrating vectors and the elements of α distribute the impact of the cointegrating vectors to the evolution of Y. The common stochastic trends in Y t are extracted using: (2) β (α Γ(1)β ) 1 α Σt k=1 u t (3) where β (α Γ(1)β ) 1 are the loadings on the common trend and the common trends are α Σt k=1 u t.

10 Empirical results I - Euro Area Step 1: Likelihood ratio-based trace test statistics: Step 2: Cointegrated VAR(2) estimation:

11 Cointegration relations - Euro Area Model 8/17/16 11:16:32 5 Cointegration relation Actual and fitted fitted core inflation Components of the cointegrating relation core inflation growth of working-age population in total population Constant Figure 2: Long-run relationship between demographics and ination

12 Cointegration relations - Euro Area P:\ECB business areas\dge\ded\monitoring and Analysis\5. Inflation (PAC)\Inflation\Drivers of inflation\consumer behaviour\demography\presentation\cvar2var Cointegration relation Actual and fitted 5 fitted core inflation Components of the cointegrating relation 5 core inflation growth of working-age population in total population Constant dumm Figure 3: Long-run relationship between demographics and ination

13 Empirical results II Step 1: Likelihood ratio-based trace test statistics: Step 2: Cointegrated VAR(2) estimation:

14 Cointegration relations - Euro Area Model 8/18/16 9:6:9 4 Cointegration relation Fitted and actual fitted core_inflation Components of cointegration relation core_inflation growth_of_working-age_population_in_total_population interest_rate Constant stepdummy Figure 4: Long-run relationship between demographics and ination

15 Ination and working age population - Japan Inflation and demographics (YoY, %) Core inflation Percentage change in working age population Figure 5: Source: Eurostat, UN Population Statistics ( )

16 Empirical results - Japan Step 1: Likelihood ratio-based trace test statistics: Step 2: Cointegrated VAR(2) estimation:

17 Cointegration relations - Japan P:\ECB business areas\dge\ded\monitoring and Analysis\5. Inflation (PAC)\Inflation\Drivers of inflation\consumer behaviour\demography\presentation\japan resu 1 Cointegration relation Fitted and actual fitted Core Components of cointegration relation 1 core growth of working age population in total poputlation interest rate Constant stepdummy Figure 6: Long-run relationship between demographics and ination

18 Ination and working age population - US Inflation and demographics (YoY, %) Core inflation Change in working age population Figure 7: Source: Eurostat, UN Population Statistics ( )

19 Empirical results - US Step 1: Likelihood ratio-based trace test statistics: Step 2: Cointegrated VAR(2) estimation:

20 Cointegration relations - US P:\ECB business areas\dge\ded\monitoring and Analysis\5. Inflation (PAC)\Inflation\Drivers of inflation\consumer behaviour\demography\presentation\us results 5 Cointegration relation Fitted and actual fitted HICPcore Components of cointegration relation core infl. 5 growth of working age population in total poulation interest rate Constant Figure 8: Long-run relationship between demographics and ination

21 Conclusions Demography matters: evidence for a stationary relationship between ination and working age population growth Monetary policy should raise its awareness of demographic forces 1.5 Working age population projections (in % change) EA US JP Figure 9: Source: UN Population Statistics (197-25)

22 THANK YOU FOR YOUR ATTENTION!