Declining fertility and mortality rates are changing the age structure of modern societies. In turn, this changes the distribution of wealth and the savings and consumption patterns within the economy. Since young and old cohorts respond differently to interest rates, the transmission mechanisms of monetary policy may depend on the age structure of the economy. The two channels which we want to address in our study are the interest rate and the wealth channel. The novelty of our study is the international dimension. When two economies with different age structures interact, monetary policy in one country may affect the transmission mechanisms and therefore inflation also in the other economy.
Our theoretical setup uses an overlapping generations (OLG) model with money supply. Following our earlier research, we juxtapose an aging and a young economy to model the different outcomes arising from different age structures. Key questions are: How does the aging of an economy affect monetary transmission mechanisms and therefore inflation? Can monetary policy attenuate the effects of population aging? How does this work in an international setting and what are the spillovers between young and aging economies?