Do demographics affect monetary policy transmission in Canada?

Abstract

Using a panel of macroeconomic data for Canada and its 10 provinces, we estimate the dynamic effects of monetary policy shocks from the mid‐1980s until the present. We then relate the change in the impact of these shocks to macroeconomic factors including demographics, specifically changes in the old age dependency ratio. We find that the inflation‐targeting regime has had an ambiguous effect on the impact of monetary policy shocks in Canada. On the other hand, changing demographics have unambiguously reduced the impact of monetary policy shocks. This can help to explain tepid inflation since the financial crisis and could eventually undermine the effectiveness of Canada's inflation targeting regime.