Working Paper Number
Aging populations have altered saving and investment patterns in many developed and emerging market economies. The structural changes that have occurred have important implications for financial stability and for the conduct of monetary policy. As assets and borrowing shifted from banks to pension funds and other institutional investors, the market-based systems that replaced bank-based systems became more procyclical and more vulnerable to systemic risk. In addition, banks’ receding share of financial assets undermined their role in channeling monetary policy initiatives and thus eroded central banks’ ability to counter excessive credit growth and contraction, defuse asset bubbles and act as effective lenders-of-last-resort in crises. This paper offers policy choices and proposals to address the adverse outcomes of these structural and institutional developments that are likely to intensify under the ongoing pressure of demographic change.