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Demographics and the natural interest rate in the euro area

Author

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  • Marcin Bielecki
  • Michał Brzoza-Brzezina
  • Marcin Kolasa

Abstract

We investigate the impact of demographics on the natural rate of interest (NRI) in the euro area, with a particular focus on the role played by economic openness, migrations and pension system design. To this end, we construct a life-cycle model and calibrate it to match the life-cycle profiles from HFCS data. We show that population aging contributes significantly to the decline in the NRI, explaining about two-thirds of its secular decline between 1985 and 2030. Openness to international capital flows has not been important in driving the EA real interest rate so far, but will become a significant factor preventing its further decline in the coming decades, when aging in Europe accelerates relative to the rest of the world. Of two possible pension reforms, only an increase in the retirement age can revert the downward trend on the equilibrium interest rate while a fall in the replacement rate would make its fall even deeper. The demographic pressure on the Eurozone NRI can be alleviated by increased immigration, but only to a small extent and with a substantial lag.

Suggested Citation

  • Marcin Bielecki & Michał Brzoza-Brzezina & Marcin Kolasa, 2020. "Demographics and the natural interest rate in the euro area," KAE Working Papers 2020-050, Warsaw School of Economics, Collegium of Economic Analysis.
    • Handle: RePEc:sgh:kaewps:2020050
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    1. Two papers on the demographics of wealth and the real interest rate decline
      by Christian Zimmermann in NEP-DGE blog on 2020-06-23 13:57:52

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    7. Marcin Bielecki & Michał Brzoza-Brzezina & Marcin Kolasa, 2022. "Aging, Migration and Monetary Policy in Poland," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 1, pages 5-30.
    8. Papetti, Andrea, 2021. "Demographics and the natural real interest Rate: historical and projected paths for the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 132(C).
    9. Giacomo Mangiante, 2022. "Demographic Trends and the Transmission of Monetary Policy," Cahiers de Recherches Economiques du Département d'économie 22.04, Université de Lausanne, Faculté des HEC, Département d’économie.
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    More about this item

    Keywords

    population aging; natural interest rate; life-cycle models; pension systems; migrations;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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