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How do baby boomers affect interest rates? A functional analysis of the impact of age distribution on macroeconomic trends

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  • Chen, Jiazi
  • Niu, Linlin

Abstract

The phenomenon of “falling stars” in the U.S., declining trends in nominal yields since the 1980s accompanied by falling inflation and real interest rates in tandem, calls for a coherent explanation of the long-term driving forces. Using data on the demographic age distribution, we estimate the functional demographic (FD) trends in these economic variables. The FD trends fit the low-frequency movements in interest rates remarkably well. Decomposition analysis shows that baby boomers’ life-cycle impact dominates the trends in interest rates until their retirement age. The FD trends of inflation and real rates are consistent with the pattern of “falling stars”.

Suggested Citation

  • Chen, Jiazi & Niu, Linlin, 2023. "How do baby boomers affect interest rates? A functional analysis of the impact of age distribution on macroeconomic trends," Finance Research Letters, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:finlet:v:53:y:2023:i:c:s1544612323000405
    DOI: 10.1016/j.frl.2023.103666
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    More about this item

    Keywords

    Interest rate; Demographic trend; Age distribution; Baby boomers; Non-parametric method;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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