We analyse both empirically and theoretically the effects of changes in demographic structure on the macroeconomy, looking particular at their impact to medium-term trends. Our empirical exercise examines the impact of the proportion of the population in each age group, on growth, savings, investment, hours, interest rates and inflation using a panel VAR estimated from data for 20 OECD economies for the period 1970-2007. This flexible dynamic structure with interactions among the main variables allows us to estimate both the direct impact of demographic structure and their feedback effects. Our estimates confirm the importance of age structure, with young and old dependants having a negative impact on most macroeconomic variables while workers contribute positively. Our theoretical framework incorporates demographic heterogeneity and endogenous productivity, allowing us to study the medium-term interaction of demographic changes and savings, investment, and innovation decisions. Theoretical simulations incorporating the changes in demographic structure experienced by many OECD countries in the past decades replicate well our empirical findings. The current trend of population aging and reduced fertility, expected to continue in the next decades, is found to be a strong force in reducing output growth and real interest rates across OECD countries.
