Demographic Effects on the Impact of Monetary Policy

We study whether the effects of monetary policy are dependent on the demographic structure of the population. We exploit cross-sectional variation in the response of US states to an identified monetary policy shock. We find that there are three distinct age groups. In response to an increase in interest rates, the responses of private employment and personal income are weaker the greater the share of population under 35 years of age, are stronger the greater the share between 40 and 65 years of age, and are relatively unaffected by the share older than 65 years. We find that all age groups become more responsive to monetary policy shocks when the proportion of middle aged increases. We provide evidence consistent with middle aged entrepreneurs starting and expanding businesses in response to an expansionary monetary shock.