The demographic transition and the asset supply channel

Amaral, Pedro (2022): The demographic transition and the asset supply channel.

Abstract

This paper examines the macroeconomic consequences of a demographic transition in an environment where a producer's capital structure is relevant, thereby introducing an asset supply channel. Producers are heterogeneous with respect to how productive they are in different states of the world and may pursue different combinations of safe and/or risky securities issuance when financing projects. I simulate a demographic transition calibrated to replicate the US experience starting in 1880. This transition results in modest increases in output, larger increases in saving as a whole, and particularly, in a relative increase in saving in the form of safe assets. Lower capital costs lead to producer entry (and more issuance) and to a tilt towards safe issuance. I show that omitting this asset supply channel, as standard representative firm models do, results in a quantitatively important overestimation of the transmission effects of the demographic transition, with larger output gains despite smaller interest rate reductions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Demographic Transition; Overlapping Generations; Asset supply; Financing Policy
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; J - Labor and Demographic Economics > J1 - Demographic Economics > J11 - Demographic Trends, Macroeconomic Effects, and Forecasts

References

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