^aDepartment of Economics and Finance, Brunel University, Uxbridge, Middlesex, UB3 4PH, U.K. E-mail: e_Philip_davis@msn.com

^* An earlier version of this paper was presented at the Austrian Central Bank Economics Conference, Vienna, 27–28 May 2004. We thank Jean-Claude Chouraqui, Edi Hochreiter, Chris Martin and Klaus Schmidt-Hebbel for helpful comments. The three consecutive sections following Introduction draw partly on work prepared for a Deutsche Bundesbank conference in 2001 (Davis, 2002).

Abstract

In common with other OECD countries and some emerging market economies (EMEs), pension reform is essential for the future stability of the EU in general and EMU countries in particular. Its progress is of major concern to central banks as well as Ministries of Finance. We have highlighted a number of risks to financial stability that may occur due to ageing itself (with pension reform) and notably when there is a continued reliance on unsustainable pay-as-you-go pension systems. There are also challenges for counter-inflation monetary policy during the ageing process, as at different points it may generate deflationary and inflationary pressures, while a fiscal crisis would have major repercussions for monetary stability. The transmission process of monetary policy will also enter a state of flux with ageing, although arguably this may be sufficiently gradual to allow policymakers time to adapt. On the other hand, we detect a negative effect of ageing on productivity, which if substantiated offers a deeper challenge both to stability and living standards as ageing progresses.