Hostname: page-component-cd9895bd7-gbm5v Total loading time: 0 Render date: 2024-12-28T11:01:16.005Z Has data issue: false hasContentIssue false
  • English
  • Français

POPULATION AGING AND THE REAL INTEREST RATE IN THE LAST AND NEXT 50 YEARS: A TALE TOLD BY AN OVERLAPPING GENERATIONS MODEL

Published online by Cambridge University Press:  05 April 2019

Nao Sudo  and
Yasutaka Takizuka
Nao Sudo*
Affiliation:
Bank of Japan
Yasutaka Takizuka
Affiliation:
Bank of Japan
*
Address correspondence to: Nao Sudo, Bank of Japan, 2-1-1 Nihonbashi-Hongokucho, Chuo-ku, Tokyo 103-8660, Japan; e-mail: [email protected]. Phone: +81-3-3279-1111. Fax: +81-3-3510-1265.
Get access Rights & Permissions [Opens in a new window]

Abstract

Population aging, along with a secular decline in real interest rates, is an empirical regularity observed in developed countries over the last few decades. Under the premise that population aging will deepen in coming years, some studies predict that real interest rates will continue to be depressed further to a level below zero. In this paper, we address this issue and explore how changes in demographic structures have affected and will affect real interest rates, using an overlapping generations model calibrated to Japan’s economy. We find that the demographic changes over the last 50 years reduced the real interest rate. About 270 out of the 640 basis points decline in real interest rates during this period was due to declining labor inputs and higher saving, which themselves stemmed from the lower fertility rate and increased life expectancy. As for the next 50 years, we find that demographic changes alone will not substantially increase or decrease the real interest rate from the current level. These changes reflect the fact that the size of demographic changes in years ahead will be minimal, but that downward pressure arising from the past demographic changes will continue to bite. As Japan is not unique in terms of this broad picture of changes in demographic landscapes in the last and next 50 years, our results suggest that, sooner or later, a demography-induced decline in real interest rates may be contained in other developed countries as well.

Keywords

Declining Real Interest RatesPopulation AgingOverlapping Generations Model
Type
Articles
Information
Macroeconomic Dynamics , Volume 24 , Issue 8 , December 2020 , pp. 2060 - 2103
Copyright
© 2019 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

The authors are grateful to the associate editor, two anonymous referees, I. Fujiwara, Y. Hirose, H. Ichiue, S. İmrohoroğlu, J. Kim, T. Kurozumi, T. Nagahata, T. Nagano, K. Nishizaki, T. Oda, M. Ogaki, K. Otsu, M. Saito, T. Sugo, T. Tsuruga, T. Yoshiba, as well as conference participants of 11th Annual Workshop of the Asian Research Network, Society for Nonlinear Dynamics and Econometrics, 2018 North American Summer Meeting of Econometric Society, and seminar participants at Osaka University and the Bank of Japan. The views expressed in this paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan.

References

Auerbach, A. and Kotlikoff, L. (1987) Dynamic Fiscal Policy. Cambridge, UK: Cambridge University Press.Google Scholar
Braun, R. A. and Joines, D. H. (2015) The implications of a greying Japan for government policy. Journal of Economic Dynamics and Control 57, 1–23.CrossRefGoogle Scholar
Braun, R. A., Ikeda, D. and Joines, D. H. (2009) The saving rate in Japan: Why it has fallen and why it will remain low. International Economic Review 50, 291–321.CrossRefGoogle Scholar
Carney, M. (2017) Globalisation and inflation. Speech delivered at 2017 IMF Michel Camdessus Central Banking Lecture, Washington, D.C., September 18.Google Scholar
Carvalho, C., Ferrero, A. and Nechio, F.(2016) Demographics and real interest rates: Inspecting the mechanism. European Economic Review 88, 208–226.CrossRefGoogle Scholar
Chen, K., İmrohoroğlu, A. and İmrohoroğlu, S. (2007) The Japanese saving rate between 1960 and 2000: Productivity, policy changes, and demographics. Economic Theory 32, 87–104.CrossRefGoogle Scholar
Draghi, M. (2016) Addressing the Causes of Low Interest Rates. Speech delivered at the annual meeting of the Asian Development Bank, Frankfurt am Main, May 2.Google Scholar
Eggertsson, G., Mehrotra, N. and Robbins, J. (2017) A Model of Secular Stagnation: Theory and Quantitative Evaluation. National Bureau of Economic Research, Inc. NBER Working Papers: No. 23093.CrossRefGoogle Scholar
Fisher, S. (2016) Why Are Interest Rates So Low? Causes and Implications. Speech delivered at the Economic Club of New York, New York, October 17.Google Scholar
Fujita, S. and Fujiwara, I. (2016) Declining Trends In The Real Interest Rate And Inflation: The Role of Aging. Federal Reserve Bank of Philadelphia. Working Papers 16–29.Google Scholar
Fujiwara, S., Iwasaki, Y., Muto, I., Nishizaki, K. and Sudo, N. (2016) Supplement Paper Series for “ Comprehensive Assesment” (2): Developments in the Natural Rate of Interest in Japan. Bank of Japan Review, 2016-E-12.Google Scholar
Gagnon, E., Johannsen, B. and Lopez-Salido, D. (2016) Understanding the New Normal: The Role of Demographics. Finance and Economics Discussion Series 2016-080, Board of Governors of the Federal Reserve System.Google Scholar
Hansen, G. D. and İmrohoroğlu, S. (2016) Fiscal reform and government debt in Japan: A neoclassical perspective. Review of Economic Dynamics 21, 201–224.CrossRefGoogle Scholar
Hayashi, F. and Prescott, E. (2002) The 1990s in Japan: A lost decade. Review of Economic Dynamics 5, 206–235.CrossRefGoogle Scholar
Holston, K., Laubach, T. and Williams, J. (2017) Measuring the natural rate of interest: International trends and determinants. Journal of International Economics 108, 59–75.CrossRefGoogle Scholar
Ikeda, D. and Saito, M. (2014) The effects of demographic changes on the real interest rate in Japan. Japan and the World Economy 32, 37–48.CrossRefGoogle Scholar
Imakubo, K., Kojima, H. and Nakajima, J. (2015) The Natural Yield Curve: Its Concept and Measurenebt. Bank of Japan Working Paper Series 15-E-5.Google Scholar
Krueger, D. and Ludwig, A. (2007) On the consequences of demographic change for rates of returns to capital, and the distribution of wealth and welfare. Journal of Monetary Economics 54, 49–87.Google Scholar
Laubach, T. and Williams, J. C. (2003) Measuring the natural rate of interest. The Review of Economics and Statistics 85, 1063–1070.Google Scholar
Lisack, N., Sajedi, R. and Thwaites, G. (2017) Demographic Trends and the Real Interest Rate. Bank of England Working Paper: No. 701.CrossRefGoogle Scholar
Miles, D. (1999) Modelling the impact of demographic change upon the economy. Economic Journal 109, 1–36.Google Scholar
Muto, I., Oda, T., and Sudo, N. (2016) Macroeconomic impact of population aging in Japan: A perspective from an overlapping generations model. IMF Economic Review 64, 408–442.CrossRefGoogle Scholar
Rachel, L. and Smith, T. (2015) Secular Drivers of the Global Real Interest Rate. Bank of England Working Paper: No. 571.CrossRefGoogle Scholar
Summers, L. (2014) US economic prospects: Secular stagnation, hysteresis, and the zero lower bound. Business Economics 49, 65–73.CrossRefGoogle Scholar
Summers, L. (2015) Demand side secular stagnation. American Economic Review 105, 60–65.Google Scholar
The Cabinet Office (2017) Economic and Fiscal Projections for Medium to Long Term Analysis.Google Scholar