Finland is greying – will this diminish the effectiveness of monetary policy?

This article examines the link between population ageing and monetary policy transmission in Finland from the perspective of consumption behaviour and the macro economy. We estimate the consumption functions of Finnish households in various age groups, using household-specific data. If consumption in the younger cohorts is more sensitive to changes in income and interest rates than consumption in the older, growth in the population share of the elderly will decrease the economic impact of changes in the key monetary policy interest rate. The effect of ageing on consumption is estimated by taking into consideration the age variation of household margins. Finally, we describe the effect of demographics on monetary policy transmission, using a general equilibrium model of the Finnish economy. The examinations are based on wealth and income distribution data from Statistics Finland.