AGE STRUCTURE AND INFLATION - A WICKSELLIAN INTERPRETATION OF THE OECD DATA

Wicksell's cumulative inflation process is founded on the separation o f investment and saving decisions. The demographic age structure influ ences the aggregate of both these decisions, and therefore should be o ne of the determinants behind the inflation processes. We study annual OECD data 1960-1994 using age variables to explain inflation. Panel e stimations of a reduced form inflation-age model show a robust correla tion consistent with the hypothesis that increases in the population o f net savers dampen inflation while especially the younger retirees fa n inflation as they start consuming out of accumulated pension claims. This pattern is expected from life-cycle saving but could also be due to age effects on budget deficits or on money demand. Our results are potentially important for inflation forecasts and monetary policy. (C ) 1998 Elsevier Science B.V. All rights reserved.