A Quantitative Assessment of the Impact of Deflation in an Aging Economy

Takemasa Oda
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Takemasa Oda: Director and Senior Economist, Institute for Monetary and Economic Studies, Bank of Japan (currently, Japan Center for Economic Research, E-mail: [email protected])

No 24-E-14, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: This paper quantitatively evaluates the long-run effects of changes in inflation on the real economy, with a focus on deflation and population aging in Japan. It develops an overlapping generations model that incorporates household demand for safe assets. The model features two channels through which a decline in inflation affects the real economy in the long run, that is, the Mundell-Tobin effect and the redistribution effect. Calibrated to the Japanese economy, the model shows that a decline in inflation does more damage to young households and impairs capital accumulation, thus reducing output and social welfare, and moreover, that the damage can be magnified by population aging. This result could provide a certain rationale for central banks to pursue and maintain a positive rate of inflation in an aging economy.

Keywords: Demographics; life cycle; deflation; Mundell-Tobin effect; redistribution; overlapping generations model (search for similar items in EconPapers)
JEL-codes: E21 E31 J11 (search for similar items in EconPapers)
Date: 2024-11
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