Skip to main content
SpringerLink
Log in

Ageing and Financial Stability

  • Conference paper
Ageing, Financial Markets and Monetary Policy

Abstract

This article reviews some of the potential pitfalls for systemic financial stability that may arise from the process of population ageing in coming decades. Although the issues are of global relevance, they will most directly affect OECD countries, such as those in the EU. We draw on the extant theoretical and empirical literature on ageing and financial instability, including projections of the macroeconomic effects of ageing and experience of recent financial crises. Our focus is largely on the forms of widespread financial instability that may affect the macroeconomy, in line with the following definition of systemic risk “a sequence of events entailing heightened risk of a financial crisis, where a financial crisis is seen in turn as ‘a major and contagious collapse of the financial system, entailing inability to provide payment services or to allocate funds for investment”1.

The author thanks Franklin Allen, Alan Auerbach, Martin Hellwig, Olivia Mitchell, Tsuyoshi Oyama, Mike Orszag and Len Skerratt as well as other participants in a seminar at the Deutsche Bundesbank for help, advice and comments. The paper draws inter alia on Davis (1995a, 1995d, 1999a) and Davis and Steil (2001). An issue arises as to whether the definition should include the mispricing of financial assets. We suggest that, though this may accompany a financial crisis, the failure of payments and of allocation of funds are the defining features. Arguably, mispricing of financial assets is quite common (eg in asset bubbles, exchange-rate misalignments and mispricing of credit risk) without entailing a financial crisis, or even systemic risk, whereas failure of payments and of credit allocation are only seen in a crisis. Mispricing may nonetheless be part of the overall pattern that builds towards a crisis. A low quality of asset managers could also emerge as an issue in some countries, leading to a need for enhanced regulation to protect against risks they may incur.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 129.00
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 169.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 169.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  • Abel, A. B. 2001. Will Bequests Attenuate the Predicted Meltdown in Stock Prices when Baby Boomers Retire?. NBER Working Paper No. 8131.

    Google Scholar 

  • Allen, F. and D. Gale. 1999. Bubbles, Crises and Policy, Oxford Review of Economic Policy, 15/3, pp. 9–18.

    Article  Google Scholar 

  • Allen, F. and D. Gale. 2000a. Bubbles and Crises, Economic Journal, 110.

    Google Scholar 

  • Allen, F. and D. Gale. 2000b. Comparing Financial Systems, MIT Press.

    Google Scholar 

  • Attanasio, O. and A. Brugiavini. 1999. Social Security and Household Saving, mimeo, UCL and University of Venice.

    Google Scholar 

  • Auerbach, A. J., L. J. Kotlikoff, R. P. Hagemann and G. Nicoletti. 1989. The Economic Dynamics of an Ageing Population: The Case of four OECD Countries, Department of Economics and Statistics Working Paper No. 62, OECD, Paris.

    Book  Google Scholar 

  • Barro, R. J. 1974. Are Government Bonds Net Wealth?. Journal of Political Economy, 82, pp. 1095–1117.

    Article  Google Scholar 

  • Bikker, J. A. 1996. National Savings, the Current Account and Ageing Populations, a Pension Fund Model. Economic and Financial Modelling. Summer 1996, pp. 1–20.

    Google Scholar 

  • Bernard, H. and J. Bisignano. 2000. Information, Liquidity and Risk in the International Interbank Market; Implicit Guarantees and Private Credit Market Failure. BIS Working Paper No. 86.

    Google Scholar 

  • Bishop, G. 1998. Securitising European Saving, Salomon Smith Barney, London, 1st December 1998.

    Google Scholar 

  • Blanchard, O. J. 1993. The Vanishing Equity Premium. In eds. R. O’Brien, Finance and the International Economy. 7, Oxford University Press.

    Google Scholar 

  • Blommestein, H. 1998. Ageing induced Capital Flows to Emerging Markets do not solve the OECD’s Basic Pension Problem. In eds. H. Blommestein and N. Funke, Institutional Investors in the New Financial Landscape, OECD, Paris.

    Google Scholar 

  • Bodie, Z. and R. C. Merton. 1992. Pension Benefit Guarantees in the United States; A Functional Analysis. In ed. R. Schmitt, The Future of Pensions in the United States, University of Pennsylvania Press.

    Google Scholar 

  • Börsch-Supan, A. 1996. The Impact of Population Ageing on Savings, Investment and Growth in the OECD Area. In Future Global Capital Shortages — Real Threat or Pure Fiction?, OECD, Paris.

    Google Scholar 

  • Börsch-Supan, A. and P. Tinios. 2000. The Greek Pension System, Strategic Framework for Reform. Presented at the Bank of Greece/Brookings Institute conference on Greece’s Economic Performance and Prospects, Athens, December 7–8, 2000.

    Google Scholar 

  • Brooks, R. 2000. Life Cycle Portfolio Choices and Asset Market Effects of the Baby Boom, IMF Working Paper WP/00/18.

    Google Scholar 

  • Buckberg, E. 1996. Institutional Investors and Asset Pricing in Emerging Market. Working Paper WP/96/2, International Monetary Fund.

    Google Scholar 

  • Chand, S. K. and A. Jaeger. 1996. Ageing Populations and Public Pension Schemes, IMF Occasional Paper No. 147.

    Book  Google Scholar 

  • Cremer, H. and P. Pestieau. 2000. Reforming our Pension System; is it a Demographic, Financial or Political Problem?. European Economic Review, 44, pp. 974–983.

    Article  Google Scholar 

  • Cutler, D., J. Poterba., L. Sheiner and L. Summers. 1990. An Ageing Society, Opportunity or Challenge?. Brookings Papers on Economic Activity, p. 1.

    Google Scholar 

  • Dang T. T., P. Anoli and H. Oxley. 2001. Fiscal Implications of Ageing Projections ofAge-Related Spending, OECD Economic Department Working Paper No. 305

    Book  Google Scholar 

  • Davis, E. P. 1994. Market Liquidity Risk. In D. Fair and R. Raymond (eds)., The Competitiveness of Financial Institutions and Centres in Europe, Kluwer Academic Publishers.

    Google Scholar 

  • Davis, E. P. 1995a. Debt, Financial Fragility and Systemic Risk, revised and extended version, Oxford University Press.

    Book  Google Scholar 

  • Davis, E. P. 1995b. Financial Fragility in the Early 1990s, what can be learnt from International Experience?. LSE Financial Markets Group Special Paper No. 76.

    Google Scholar 

  • Davis, E. P. 1995c. Institutional Investors, unstable Financial Markets and Monetary policy. In F. Bruni, D. Fair and R. O’Brien eds., Risk Management in Volatile Financial Markets, Kluwer, Amsterdam.

    Google Scholar 

  • Davis, E. P. 1995d. Pension Funds, Retirement-Income Security and Capital Markets, an International Perspective, Oxford University Press.

    Google Scholar 

  • Davis, E. P. 1997. Population Ageing and Retirement income provision in the European Union. In Ed. B. Bosworth and G. Burtless, Ageing Societies, the Global Dimension. Brookings Institution Press, Washington DC, (also Special Paper, Royal Institute of International Affairs, London).

    Google Scholar 

  • Davis, E. P. 1998. Investment of Mandatory funded Pension Schemes. Discussion Paper No. PI-9908, the Pensions Institute, Birkbeck College.

    Google Scholar 

  • Davis, E. P. 1999a. Financial Data needs for Macroprudential Surveillance, Lecture Series No 2, Centre for Central Banking Studies, Bank of England.

    Google Scholar 

  • Davis, E. P. 1999b. Russia/LTCM and Market Liquidity Risk. The Financial Regulator, 4/2, Summer 1999, pp. 23–28.

    Google Scholar 

  • Davis, E. P. 2001a. Multiple Channels of Intermediation, Corporate Finance and Financial Stability, Working Paper No. 01115, International Monetary Fund.

    Google Scholar 

  • Davis, E. P. 2001. Portfolio Regulation of Life Insurance Companies and Pension Funds. Working Paper No. PI-0101, The Pensions Institute, Birkbeck College, London.

    Google Scholar 

  • Davis, E. P. and B. Steil. 2001. Institutional Investors, MIT Press.

    Google Scholar 

  • Demirguc-Kunt, A. and E. Detragiache. 1998a. The Determinants of Banking Crises in Developing and Developed Countries. IMF Staff Papers, 45, pp. 81–109.

    Google Scholar 

  • Demirguc-Kunt, A. and E. Detragiache. 1998b. Financial Liberalisation and Financial Fragility. IMF Working Paper No WP/98/83.

    Google Scholar 

  • Diamond, D. and P. Dybvig P. 1983. Bank runs, Deposit Insurance and Liquidity. Journal of Political Economy, 91, pp. 401–19.

    Article  Google Scholar 

  • Disney, R. 1996. Can we Afford to grow older?, MIT Press.

    Google Scholar 

  • Disney, R. 2000. Declining public pensions in an era of Demographic Ageing: will private pensions fill the gap?. European Economic Review, 44, pp. 957–973.

    Article  Google Scholar 

  • Engelhardt, G. and J. M. Poterba. 1991. Demographics and House Prices; The Canadian Evidence. Regional Science and Urban Economics, 21, pp. 539–46.

    Article  Google Scholar 

  • Engen, E. M. and A. Lehnert. 2000. Mutual Funds and the US Equity Market. Federal Reserve Bulletin, December 2000, pp. 797–812.

    Google Scholar 

  • Englund, P. 1999. The Swedish Banking Crisis, Roots and Consequences. Oxford Review of Economic Policy, 15/3, pp. 80–97.

    Article  Google Scholar 

  • Erb, C. B., C. R. Harvey and T.E. Viskanta. 1997. Demographics and International Investment, Financial Analysts Journal, 53, July/August, pp. 14–28.

    Article  Google Scholar 

  • Feldstein, M. 1974. Social Security, Induced Retirement and Aggregate Capital Formation, Journal of Political Economy, 82, pp. 905–6.

    Article  Google Scholar 

  • Feldstein, M. 1977. Social Security and Private Saving; International Evidence in an Extended Life Cycle Model. In M. Feldstein and R. Inman. The Economics of Public Services, International Economic Association.

    Google Scholar 

  • Feldstein, M. 1995. Social Security and Saving, new Time Series Evidence. NBER Working Paper No. 5054.

    Google Scholar 

  • Fisher, I. 1933. The Debt Deflation Theory of Great Depressions, Econometrica, pp. 337–57.

    Google Scholar 

  • Fortune, P. 1998. Mutual Funds, Part II; Fund flows and security returns, New England Economic Review, Jan/Feb, pp. 4–22.

    Google Scholar 

  • Friedman, M. and A. J. Schwartz. 1963. A Monetary History of the US 1867–1960, NBER, New York.

    Google Scholar 

  • Froot, K.A., D.S. Scharfstein and J.C. Stein. 1992. Herd on the Street: Informational Inefficiencies in a Market with Short-Term Speculation. The Journal of Finance, 47, pp. 1461–84.

    Article  Google Scholar 

  • Giavazzi, F. and M. Pagano. 1995. Non Keynesian Effects of Fiscal Policy Changes; International Evidence and the Swedish Experience, Working Paper No 1284, CEPR, London.

    Google Scholar 

  • Gilson, S., J. Kose and L. Lang. 1990. Troubled Debt Restructurings, Journal of Financial Economics, 27, pp. 315–53.

    Article  Google Scholar 

  • Glick, R. and A. K. Rose. 1998. Contagion and Trade; why are Currency Crises Regional?, mimeo, Federal Reserve Bank of San Francisco.

    Google Scholar 

  • Greenspan, A. 1999. Do Efficient Financial Markets Mitigate Financial Crises?. Speech to the Financial Markets Conference of the Federal Reserve Bank of Atlanta, 19 October.

    Google Scholar 

  • Guttentag, J. M. and R.J. Herring. 1984. Credit Rationing and Financial Disorder. Journal of Finance, 39: pp. 1359–82.

    Article  Google Scholar 

  • Hagemann, R. P. and G. Nicoletti. 1989. Ageing Populations; Economic Effects and Implications for Public Finance. Department of Economics and Statistics, Working Paper No. 61, OECD, Paris.

    Book  Google Scholar 

  • Hardy, D. C. and C. Pazarbasioglu. 1998. Leading Indicators of Banking Crises; was Asia Different?. IMF Working Paper No. WP/98/91

    Google Scholar 

  • Hargraves, M., G.J. Schinasi and S. R. Weisbrod. 1993. Asset Price Inflation. In the 1980s: a Flow of Funds Perspective, IMF Working Paper No. WP/93/77.

    Google Scholar 

  • Heller, P., R. Hemming and P.W. Kohnert. 1986. Ageing and Social Expenditures in Major Industrial Countries 1980–2025, Occasional Paper No. 47, International Monetary Fund, Washington DC.

    Google Scholar 

  • Hellman, T. F., K. Murdock and J.E. Stiglitz. 2000. Liberalisation, Moral Hazard in Banking and Prudential Regulation; are Capital Requirements Enough?, American Economic Review, 90, pp. 147–165.

    Article  Google Scholar 

  • Hendershott, P. H. 1991. Are Real House Prices Likely to Decline by 47%?, Regional Science and Urban Economics, 21, pp. 553–65.

    Article  Google Scholar 

  • Herring, J. 1999. Credit Risk and Financial Instability. Oxford, Review of Economic Policy, 15/3, pp. 63–79.

    Article  Google Scholar 

  • Horioka, C. Y. 1991. The Determinants of Japans Private Saving Rate, the Impact of the Age Structure of the Population and other Factors. Bank of Japan Economic Studies Quarterly, 42, pp. 237–53.

    Google Scholar 

  • Hoshi, T., A. Kashyap and D. Scharfstein. 1993. The Choice between Public and Private Debt; an Analysis of Post Deregulation Corporate Financing in Japan. Working Paper No. 4211, National Bureau of Economic Research.

    Google Scholar 

  • IMF. 1998. World Economic Outlook and International Capital Markets, Interim Assessment December 1998 — Financial Turbulence and the World Economy. IMF, Washington D.C.

    Google Scholar 

  • IMF. 2000. Macroprudential Indicators of Financial System Soundness. Occasional Paper No. 192, IMF, Washington D.C.

    Google Scholar 

  • Kaminsky, L. G. and CM. Reinhart. 1999. The Twin Crises; the Causes of Banking and Balance-of-Payments Problems, American Economic Review, 89, pp. 473–500.

    Article  Google Scholar 

  • Keeley, M. C. 1990. Deposit Insurance, Risk and Market Power in Banking. American Economic Review, 80: pp. 1138–99.

    Google Scholar 

  • Kindleberger, C. P. 1978. Manias, Panics and Crashes, A History of Financial Crises, Basic Books, New York.

    Google Scholar 

  • King, M. A. and L. Dicks Mireaux . 1988. Portfolio Composition and Pension Wealth: an Econometric Study. In eds. Z. Bodie , J.B. Shoven and D.A. Wise, Pensions in the US Economy, University of Chicago Press.

    Google Scholar 

  • Knight, F. H. 1921. Risk, Uncertainty and Profit, Boston; No. 16 in a Series of Rare Texts in Economics, Republished by the LSE.

    Google Scholar 

  • Kohl, R. and P. O’Brien. 1998. The Macroeconomics of Ageing, Pensions and Savings; a Survey. Economics Department Working Paper No. 200, OECD, Paris

    Book  Google Scholar 

  • Krugman, P. 1991. Financial Crises in the International Economy. In M. Feldstein, ed. The Risk of Economic Crisis, Univ. of Chicago Press.

    Google Scholar 

  • Leibfritz, W., D. Roseveare, D. Fore, and E. Wurzel. 1996. Ageing Populations, Pension Systems and Government Budgets — how do they Affect Saving?. In: Future Global Capital Shortages — Real Threat or Pure Fiction?, OECD, Paris.

    Google Scholar 

  • Mankiw, N. G. and D.N. Weil . 1989. The Baby Boom, the Baby Bust and the Housing Market. Regional Science and Urban Economics, 19, pp. 238–258.

    Article  Google Scholar 

  • Masson, P. and R.W. Tryon. 1990. Macroeconomic Effects of Projected Population Ageing in Industrial Countries. IMF Staff Papers, 37, pp. 453–485.

    Google Scholar 

  • Masson, P., T. Bayoumi. and H. Samiei. 1995. International Evidence on the Determinants of Private Saving. IMF Working Paper No. W95/51.

    Google Scholar 

  • Mayer, C. P. 1999. The Assessment; Financial Instability, Oxford Review of Economic Policy, 15/3, 1–8.

    Article  Google Scholar 

  • Miles, D. and B. Patel. 1996. Saving and Wealth Accumulation in Europe, the Outlook into the next Century. Merrill Lynch, Financial Research, 3 June 1996.

    Google Scholar 

  • Miles, D. K. 1999. Funded and Unfunded Pension Schemes; Risk, Return and Welfare. Mimeo, Imperial College, London.

    Google Scholar 

  • Minsky, H. P. 1977. A Theory of Systemic Fragility. In: E.I. Altman and A.W. Sametz, ed. Financial Crises, Wiley, New York..

    Google Scholar 

  • Mishkin, F. S. 1991. Asymmetric Information and Financial Crises: A Historical Perspective, in R.G. Hubbard ed. Financial Markets and Financial Crises, University of Chicago Press, Chicago.

    Google Scholar 

  • Mitchell, O. S. and Z. Bodie. 2000. A Framework for Analysing and Managing Retirement Risks, Working Paper No. PRC WP 2000–4, Pension Research Council, The Wharton School, University of Pennsylvania.

    Google Scholar 

  • Munnell, A. H. 1987. The Impact of Public and Private Saving Schemes on Saving and Capital Formation. In: Conjugating Public and Private, the Case of Pensions. International Social Security Association, Studies and Research, 24, pp. 219–36.

    Google Scholar 

  • Nakagawa, S. 1999. Why has Japans Household Savings Rate Remained High during the 1990s?. Reprinted from Bank of Japan Monthly Bulletin, April 1999

    Google Scholar 

  • Neuberger, A. 1999. Long Term Savings Flows and the Capital Market, Morgan Stanley Dean Witter Global Pensions Quarterly, January 1999.

    Google Scholar 

  • Oyama, T. and K. Yoshida. 1999. Does Japan Save too Little or do Other Countries save too much?. Working Paper No. 99–5, Research and Statistics Department, Bank of Japan.

    Google Scholar 

  • Poterba, J. M. 1998. Population Age Structure and Asset Returns — An Empirical Investigation. NBER Working Paper No. 6774.

    Google Scholar 

  • Reisen, H. 1998. Warning; Past Pension Fund Performance is no Guarantee for Future Performance. In eds. H. Blommestein and N. Funke, Institutional Investors in the New Financial Landscape, OECD, Paris.

    Google Scholar 

  • Roseveare, D., W. Leibfritz., D. Fore, and E. Wurzel. 1996. Ageing Populations, Pension Systems and Government Budgets: Simulation for 20 OECD Countries. Economics Department Working Paper No. 168, OECD, Paris.

    Book  Google Scholar 

  • Scharfstein, D. S. and J. C. Stein, 1990. Herd Behaviour and Investment, American Economic Review, 80, pp. 465–79.

    Google Scholar 

  • Schieber, S. J. and J. Shoven. 1994. The Consequences of Population Ageing on Private Pension Fund Saving and Asset Markets. NBER Working Paper No. 4665.

    Google Scholar 

  • Shafer, J. R. 1986. Managing Crises in the Emerging Financial Landscape, OECD Economic Studies, 8, pp. 56–11.

    Google Scholar 

  • Stiglitz, J. E. 2000. Capital Market Liberalisation, Economic Growth and Instability, World Development, 28, pp. 1075–1086.

    Article  Google Scholar 

  • Trzcinka, C. 1998. The Conflicting Views and Management Practices of Institutional Equity Investing, Financial Markets, Institutions and Instruments, 7, pp. 20–53

    Article  Google Scholar 

  • Turner, D., C. Giorno, A. De Serres, A. Vourch and P. Richardson. 1998. The Macroeconomic Implications of Ageing in a Global Context, Economics Department Working Paper No. 193, OECD, Paris.

    Book  Google Scholar 

  • Wattenburg, B. 1987. The Birth Dearth, Pharos Books, New York.

    Google Scholar 

  • World Bank. 1994. Averting the old Age Crisis; Policies to Protect the old and Promote Growth, The World Bank, Washington DC.

    Google Scholar 

Download references

Authors
  1. E. Philip Davis
    View author publications

    You can also search for this author in PubMed Google Scholar

Editor information

Editors and Affiliations

  1. Department of Economics, University of California, 549 Evans Hall, 94720-3880, Berkeley, CA, USA

    Alan J. Auerbach

  2. Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431, Frankfurt am Main, Germany

    Heinz Herrmann

Rights and permissions

Reprints and permissions

Copyright information

© 2002 Springer-Verlag Berlin Heidelberg

About this paper

Cite this paper

Davis, E.P. (2002). Ageing and Financial Stability. In: Auerbach, A.J., Herrmann, H. (eds) Ageing, Financial Markets and Monetary Policy. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-04779-8_13

Download citation

  • DOI: https://doi.org/10.1007/978-3-662-04779-8_13

  • Publisher Name: Springer, Berlin, Heidelberg

  • Print ISBN: 978-3-642-07661-9

  • Online ISBN: 978-3-662-04779-8

  • eBook Packages: Springer Book Archive

Publish with us

Policies and ethics

Search

Navigation