Population aging and inflation: evidence from panel cointegration

Abstract

This study investigates the relationship between demography and inflation using panel cointegration for 24 countries during 1961–2014. It shows that the age structure of the population affects inflation. The answer to the question “is population aging inflationary or disinflationary?” depends on the stage of the demographic process and, particularly, on the consideration that the share of mature workers is increasing or decreasing. The empirical results support the existence of a long-run equilibrium function between inflation and the changes in the shares of the population under 20 years of age, young adults (20–34), middle-age people (35–64), and older-old people (75+). The panel least squares equations for inflation with population age shares growth, GDP growth, M2 growth, exchange rate growth, labour costs and recession dummy variables as exogenous regressors allow the identification of the population shares that have positive significant impact on inflation, and those that have negative significant effects on inflation.

Keywords

• inflation
• demographics
• aging
• panel cointegration