Working Paper（26-019E）The Aging Trap: Why Aging Induces Deflation and Secular Stagnation and Constrains Government Policy

Routine variation in household labor supply, consumption, saving, and portfolio choice decisions over the lifecycle influences aggregate economic activity in an aging society because the size of different age groups changes. In rapidly aging societies such as Japan, this mechanism produces an aging trap. The inflation rate is low or negative. Real interest rates and per capita output are also persistently low. Unlike inflation, they resist monetary and fiscal stimulus. Monetary policy can offset the decline in the inflation rate, but neither aggressive central bank interest rate policies nor large increases in the public debt–output ratio offset the persistent declines in real interest rates and output.

JEL classification: E52, E62, G51, D15.

Keywords: Deflation, Secular stagnation, Lifecycle, Portfolio choice, Nominal government debt, Aging, Tobin effect, Fiscal policy, Monetary policy.