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Older, wealthier households more sensitive to monetary policy shocks, study says

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Older, wealthier households more sensitive to monetary policy shocks, study says

Older and wealthier households are more sensitive to changes in monetary policy than other age groups, according to a paper published by the National Bureau of Economic Research, or NBER.

Monetary policy instruments that affect asset values, such as rate cuts that tend to have a positive effect on the value of long-term assets such as government bonds, have a greater impact on older households than those headed by young or middle-aged Americans.

Looking at data from the Consumer Expenditure Survey, the researchers found that older households' consumption spending is more responsive to monetary policy shocks than the spending of younger groups. High-income older households are particularly responsive to monetary policy movements.

On average, older households hold more wealth and depend less on labor income to support consumption. This makes their consumer spending increase more than that of younger households whenever expansionary monetary policy results in higher asset values.

NBER's researchers pointed out that older households are more likely to finance their consumption from investment income or from the sale of accumulated assets, and are more likely to hold long-term assets than their younger counterparts. Interest rate hikes decrease the value of most long-term assets, and in turn can dampen consumer spending among older households.

Young and middle-aged households tend to respond to monetary policy-induced shifts in their potential consumption by changing their labor supply behavior.

The researchers concluded that differences among age groups' responses to monetary policy may impact macroeconomic policy in the U.S. and other developed nations with aging populations, adding that aggregate demographic trends may affect the overall effectiveness of monetary policy.