The role of pension systems and demographic change for asset prices and capital formation

The paper develops a large-scale overlapping generations model with production and a stochastic asset market. The role of a pension system and the impact of demographic change on real and financial markets are analyzed. In the absence of demographic change a reduction in contribution rates increases the long-run levels of capital and asset prices while reducing interest rates. In addition a lower contribution rate may stabilize financial markets by reducing the volatility and avoiding crashes in asset prices. Demographic change due to a shrinking population induces a meltdown of capital and asset prices confirming results in the literature.