Abstract:
Retirement benefits in industrialized countries have come under great pressure. How should one conduct monetary policy in this scenario? Do low interest rates necessarily stimulate demand? The paper builds a New Keynesian overlapping generations model. The “standard” monetary transmission obtains whenever public pensions are sufficiently generous. Below a critical level of government-provided pensions, however, low interest rates can show their darker side: lower interest rates may turn into the cause of a recession rather than supporting economic activity. This is more likely if households do not want to substitute intertemporally, or if they cannot. For example, because the young are borrowing-constrained and the constraints do not ease sufficiently.
Host: Hans Holter