The ambiguous effects of population aging on macroeconomic stability: a cross-country analysis

Abstract

While a vast literature has shown that population aging reduces productivity and slows down economic growth, the evidence on the impact of aging on business cycles’ volatility is scarce. Population aging compromises the effectiveness of fiscal and monetary policy and affects the labor market’s dynamics, which may lead to increased macroeconomic volatility. However, economic agents’ behavioral changes due to increased longevity may produce more stable business cycles. Building on a previous study, this article shows that while output volatility grows as the population ages, consumption and investment volatility drops. This seemingly contradictory result arises because of the impact of aging on the labor market’s dynamics.