Demographics and Business Cycle Volatility

This one should really go on Beta.Sources, but I thought that it derserved attention over and above the fold too. It is a couple of years old, but still well worth a look; hat tip (an old BW blog post).

We investigate the consequences of demographic change for business cycle analysis. We find that changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the U.S. and other G7 economies. During the postwar period, these countries experienced dramatic demographic change, although details regarding extent and timing differ from place to place. Using panel-data methods, we exploit this variation to show that the age composition of the workforce has a large and statistically significant effect on cyclical volatility. We conclude by relating these findings to the recent decline in U.S. business cycle volatility. Using both simple accounting exercises and a quantitative general equilibrium model, we find that demographic change accounts for a significant part of this moderation.

Over and beyond the idea that demographics may act as a strong catalyst of capital flows (i.e. domestic savings/investment dynamics) and thus how demographics may transmit volatility in the global economy, the direct relation between volatility and demographics is fascinating. In fact, it is of course entirely intuitive if you apply e.g. a life course perspective in which you look at issues such as timing of housing purchase, durable and non-durable purchase, as well as the ultimate transmitter; age dependent risk aversion and/or an age dependent intertemporal consumption decision profile.