The Korean Journal of Economic Studies
Demographic Shifts and Sensitivity of Consumption to Interest Rate Changes
Jaeho Lee (Bank of Korea)Year 2024Vol. 72
This study reveals that older individuals are less sensitive to interest rate changes in their spending using household-level data. For instance, a 40-year-old reduces consumption by 2.92% when rates rise by 1%p, while a 60-year-old reduces it only by 1.92%. This age-related difference is due to the weaker intertemporal substitution effects among the elderly, driven by their reliance on service consumption. Asset effects, stemming from larger financial holdings, also offset intertemporal substitution effects. Lastly, the age-related difference can reduce the interest rate sensitivity of Korea’s aggregate consumption by 9.71% during 2021-41, suggesting that monetary policy can be less effective in an aging economy.