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Demographics and the Natural Rate of Interest in Japan

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  • Mr. Fei Han

Abstract

Japan’s aging and shrinking population could lower the natural rate of interest and, together with low inflation expectations, challenge the Bank of Japan’s efforts to reflate the economy. This paper uses a semi-structural model to estimate the impact of demographics on the natural rate in Japan. We find that demographic change has a significantly negative impact on the natural rate by lowering trend potential growth. We also find that the negative impact has been increasing over time amid stronger demographic headwinds. These findings highlight the importance of boosting potential growth to offset the negative demographic impact and lift the natural rate in Japan.

Suggested Citation

  • Mr. Fei Han, 2019. "Demographics and the Natural Rate of Interest in Japan," IMF Working Papers 2019/031, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2019/031
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    2. Dilian Vassilev, 2020. "Secular stagnation – the origin of the concept, a review of the scientific literature and the nature of the academic debate," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 137-158.
    3. R. Anton Braun & Daisuke Ikeda, 2022. "Why Aging Induces Deflation and Secular Stagnation," FRB Atlanta Working Paper 2022-12, Federal Reserve Bank of Atlanta.
    4. Hongjin Li & Naifang Su, 2020. "Financial Factors, Openness and the Natural Interest Rate in China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 28(4), pages 76-100, July.
    5. Bodnár, Katalin & Nerlich, Carolin, 2022. "The macroeconomic and fiscal impact of population ageing," Occasional Paper Series 296, European Central Bank.

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