and a declining working - age population. to deal with the present and forthcoming challenges for japan, we may need to rely more on the perspective offered by keynes who tried to elaborate on the size of population itself and changes in its composition. it is fairly certain that not only advanced economies, but also a number of emerging economies are, sooner or later, expected to face the similar challenge as we proceed down the road ( slide 8 ). 8 demography and aggregate demand demographic changes affect economic growth through a variety of channels. to start with, in a country facing a diminishing population, like japan, a declining working - age population would rein in growth momentum on the supply - side. admittedly, because we need to take demographic factors as given for the time being, we should pursue higher labor force participation rates of female workers and the aged people. on top of this, attempts to enhance the quality of the labor force by improving education and vocational training systems are warranted as well. we may need to recognize the complex fallout of a demographic vortex on aggregate demand. a shrinking working - age population could be an outright factor that reduces aggregate consumption. on the other hand, the life - cycle model of consumption predicts that the ageing of society would spur the consumption of the elderly as they reduce their savings. in fact, a common observation across economies is that, as a general pattern, the elderly tend to cut their spending on durable goods while they increase demand for services to maintain their quality of life, such as medical and nursing services. we may need to bear in mind, however, that provision of these services tends to be subject to intensive government regulations. if the supply that can meet the demand of aged people would be hampered by misaligned regulations which do not reflect the changes in society and technology progress, potential consumption demand would not materialize. see bernanke ( 1983 ). see keynes ( 1937 ). see shirakawa ( 2011 ). bis central bankers ’ speeches the foregoing argument reaffirms the importance of the flexibility of the social and economic systems that can ensure their own sustainability in the face of a demographic vortex. we could also bear in mind how the ageing of voters affects the social choices reflecting their preferences ( slide 9 ). demography and business cycles as i mentioned at the outset, the third lens suggests that boom - bust cycles and demographic changes could interact with each other. for example, the spending wave hypothesis suggests a possible linkage between the

##s as the extra compensation for the uncertainty around anticipated economic and financial outcomes. this compensation is determined by both perception of risks and investor preferences, or risk aversion. among the risk premiums that we monitor regularly at the federal reserve are those on equity returns, equity volatility, corporate bonds, and treasury securities. each contains information about a different risk around a different expected outcome. clearly, the separation of market prices into distinct pieces reflecting expected values and risk is a difficult task that relies heavily on modeling assumptions about underlying processes and investor behavior. indeed, think of all the constituents of, say, a long - term corporate bond yield. such a yield encompasses compensation for expected real rates, for expected inflation, for expected default, and for the expected liquidity in the instrument, and it contains conceptually separate risk premiums for uncertainty about each of these underlying factors. in principle, an ideal model would account for each of those components separately. in practice, however, we have yet to achieve such a fine breakdown, and the estimate of any one or group of those components is likely to be highly dependent on the estimates of the others. although some promising research on modeling these components - - jointly or individually - - is under way, we need to be especially aware of our theoretical and empirical limitations when interpreting market price movements. but these qualifications do not diminish the point that risk premiums are certainly relevant for monetary policy deliberations, and we do pay attention to our best estimates of them. we, as policymakers, form our own independent view of the expected path of a number of macroeconomic and financial variables, but we are also obviously interested in gauging investors'roberto perli and paul harrison, of the board's staff, made important contributions to this talk. expectations about the future paths of those same variables. investor expectations shape the market reaction to new economic data and to our policy actions, and when those expectations differ from our own, they could embed information that we might wish to factor into our own analysis. investors'expectations are reflected in asset prices, but so are risk premiums, and inferences about future economic conditions obtained from market prices are conditional on estimates of those premiums. neglecting or grossly misestimating risk premiums will lead to misperceptions of the market's outlook and thus potentially to market moves that we did not anticipate. nothing better illustrates the need to properly account for risk premiums than the current