MEASURING THE IMPACT OF DEMOGRAPHIC CHANGE ON AGGREGATE PERSONAL SAVING AND CONSUMER DEBT
Abstract
The falling saving rate and increasing ratio of consumer installment debt to income over the past ten years have been explained adequately or inadequately by inflation, tax structure, and social security. The following proposes an additional explanation for the observed economic behavior: demographic change. Why is demographic change potentially important in determining changes in economic aggregates over time? If consumers with different demographic characteristics demonstrate different economic behavior, as the distribution of demographic characteristics changes within society, aggregate behavior will change. This phenomenon is independent of changes in economy wide incentives such as inflation, taxes, and social security. Also, if different demographic groups have different sensitivities to economy wide incentives, as these incentives change with changes in demographic distributions, economic aggregates will change. The magnitude of the aggregate change will depend upon both the sensitivities of the groups to the change in incentives as well as the representation of each group in the economy. What must be done to ascertain the relevant magnitudes of change is to separate the effects of incentive changes on aggregate behavior from the effects of demographic distributional changes on aggregate behavior. What are the demographic changes that have occurred in recent years? The change in the age distribution because of the post war baby boom implies that society is aging. The fastest growing age cohorts for the next twenty years will be the cohorts represented by people aged 35 to 44 years while the slowest growing cohorts are those represented by consumers younger than 25 years. The retirement aged cohorts are increasing in size, but at a declining rate. Further demographic changes include changes in household composition. Families are becoming smaller and single person households will continue to increase in number relative to the number of family households. Nonfamily households will also increase in number relative to the number of traditional family households in the next few decades. How can the components of aggregate economic change be measured? It is shown with a microeconomic model of saving and debt that individual economic behavior varies with demographic characteristics. Then the microparameters for each of the life cycle groups are used to decompose the aggregate economic parameters. In the process, the econometric problem of aggregation is addressed.
Degree
Ph.D.
Subject Area
Economics
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