Selected Questions From Tyler Cowen’s 2005 Macro Final

Note: I’m working through Tyler’s 2005 Macro final. 

3. How will the aging baby boom generation affect the following and why? Savings rates, interest rates (real, nominal, short and long term), Fed policy, inflation, and investment.

We’re going to become (ARE!) a savings-driven society. That means zero tolerance for inflation with all the painful adjustments implicit in changing inflation regimes. And don’t expect the fed to push extra-hard against this political force to keep its 2% implicit target. Ouch.

Increasing dependency ratios are going to drag the economy a bit, which means a lower demand for loans to complement the increased supply.  I’m sure that the elderly will limit consumption to conserve savings even further than we might expect them to.

Demand is a big problem in an old society.  Nice little throwaway comment there, but what does it mean? It means that the marginal consumer wants to spend less than last year but also does not want to invest the savings of others in novel or innovative productive activities. Leisure is good for your own kids, but not for every one else’s kids. Steve Jobs’ kids knew their old man less than he would have liked but we’re all better off for it.

More downward pressure on inflation. Who wants to invest in this environment? Trick question: more people than ever (savings are up and S = I!). But they want to keep their savings at home, not spread them around the world looking for opportunities!

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