No. 1149 - Looking behind the financial cycle: the neglected role of demographics

Data demonstrate a correlation between demographic variables and financial cycle: an increase in the working-age population is associated with an expansion of the financial cycle, that is, credit growth and increased housing prices. To account for this stylized fact, this paper uses an OLG model with data on housing prices, life-cycle of income, and consumption. A transitory baby boom, which increases the working-age population, leads to higher housing prices and household borrowing.