European Central Bank working paper models how ageing and pension design reshape monetary policy transmission

The European Central Bank published a working paper that builds a New-Keynesian model with age cohorts, retirement, and unemployment risk to study how pension arrangements interact with monetary policy and shape both distributional and aggregate outcomes. The paper concludes that monetary-policy shocks can affect young job seekers, young employed workers and older workers differently, and that pension generosity and the age distribution of safe-asset holdings can materially change the strength of monetary transmission. In the model, the distribution of government bond holdings across cohorts is endogenous and influences how well the young can self-insure against unemployment through precautionary savings. The analysis finds that, in a monetary expansion, consumption of the middle aged rises substantially less than consumption of the young, while consumption of newly retired households falls robustly when interest rates decline, although by less than 0.3%. Retirement policy changes can shift bond holdings from middle-aged savers to younger households, potentially raising consumption during sustained unemployment even if higher taxes reduce unemployment benefits, and can amplify or dampen business-cycle responses by altering both market incompleteness and the equilibrium real interest rate. The paper notes that these mechanisms also depend on government bond supply and the life-cycle wage profile, suggesting central banks should monitor age and employment distributions of asset holders when assessing the impact of rate changes.