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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: nao.sudou@boj.or.jp. Phone: +81-3-3279-1111. Fax: +81-3-3510-1265.
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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

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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.

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