First, although monetary policy cannot affect the growth rate of potential output or the long-run natural rate of unemployment, it needs to take these into account as part of the economic environment, and to consider the downward pressure demographics put on both relative to their historical levels.

Second, changes in demographics could also affect the transmission mechanism of monetary policy to the economy, in particular, the strength of wealth effects versus income effects. Older people tend to hold more assets than the young and tend to be creditors while drawing down their assets to fund their consumption during retirement. Younger people tend to be borrowers but face tighter credit constraints than the old because they hold fewer assets. As the share of the population shifts from young to old, the propagation of an interest rate change through the economy is likely to change. There will be a smaller share of young borrowers able to take advantage of a decrease in interest rates but a larger share of older people who benefit from higher asset prices; similar reasoning applies for an increase in interest rates. Demographic change may mean that wealth effects become a more important channel through which monetary policy affects the economy.

A third important implication of demographic change for monetary policy is through its effect on the equilibrium long-term interest rate. FOMC participants have been lowering their estimates of the fed funds rate that will be consistent with maximum employment and price stability over the longer run. The median estimate has decreased from 4 percent in March 2014 to 2.8 percent today. And empirical estimates of the equilibrium real fed funds rate, so-called r-star, while highly uncertain, are lower than in the past.

Demographic change may be a factor in this decline to the extent that it results in a lower long-run growth rate of consumption and, therefore, of output, which is a key determinant of the longer-run equilibrium interest rate. The magnitude of any effect is difficult to determine because complicated dynamics are at work. Static analysis might suggest that as longevity increases, people will want to accumulate more assets to fund their retirements and this would put upward pressure on asset prices and, therefore, downward pressure on returns. Moreover, because people prefer to reduce their exposure to risk as they age, we might expect to see a shift toward assets with fixed returns, putting upward pressure on risk premia and downward pressure on risk-free rates.  However, older people also tend to save less because once people reach retirement age, they need to draw down their savings and perhaps sell assets to fund their retirement. This countervailing effect from dissaving, as well as public spending on retiree benefits, would tend to put upward pressure on interest rates. Thus, the magnitude and even the sign of the effect of demographic change on interest rates are empirical questions.

So far, there is little evidence that demographic trends are driving large-scale shifts into fixed-income investments that would depress returns; indeed, the evidence suggests that people are under-saving for retirement. Historically, there appears to be only a weak correlation between age structure in the U.S. and asset returns.  Ultimately, how demographics affect economic outcomes will also depend on how governments respond, so in the remainder of my time, let me discuss the implications of demographic change for fiscal and other government policies.