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Demographics and the natural real interest Rate: historical and projected paths for the euro area

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  • Papetti, Andrea

Abstract

This paper employs a large-scale overlapping generation model quantifying that demographics account for a decrease in the natural real interest rate of about 1.4 percentage points in the euro area compared with the average for the 1980s to 2030 (roughly at its trough), under the baseline calibration. Two channels prevail in providing the downward impact: the increasing scarcity of effective labor input and the growing willingness of individuals to save due to longer life expectancy. Mitigating factors are: greater substitutability between labor and capital, higher intertemporal elasticity of substitution in consumption, higher productivity and participation by older individuals and, to a lesser extent, a higher retirement age. Absent pay-as-you-go pension systems, the natural rate would stand at a lower level of about 0.5 percentage points by 2030. The simulated paths of the natural real interest rate and output growth are consistent with econometric estimates.

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  • 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).
    • Handle: RePEc:eee:dyncon:v:132:y:2021:i:c:s0165188921001445
    DOI: 10.1016/j.jedc.2021.104209
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    More about this item

    Keywords

    Population aging; Natural interest rate; Secular stagnation; Overlapping generations;
    All these keywords.

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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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