Seminar “The demographic transition and monetary policy in a small open economy“ by Marcin Kolasa, NBP
Please register by sending an email to [email protected] with your full name, surname and university/work-place until 27 Septmeber, 13:00.
Seminar language: English
The existing literature shows that population aging lowers the natural (equilibrium) rate of interest (NRI) and, as a result, can impact on monetary policy. Several questions emerge. First, whether this impact is substantial or not - the existing findings are mixed. Second, how the results depend on the closed vs. open economy assumption, in particular what happens in a small open economy when the world faces a demographic change as well. Third, what happens if the central bank learns the decline of the NRI only slowly over time. Fourth, whether the declining NRI generates problems related to the zero lower bound (ZLB). We show that given the prospective demographics of our country under investigation (Poland), the decline in interest rates is substantial - almost 2 percentage points, albeit spread over a period of 40 years. The declining interest rate abroad spills over, however, to a small extent - domestic developments are key. If the central bank is slow in learning the declining NRI a long period of inflation below the target is likely. In this case the ZLB probability increases sharply, even in the near horizon.