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Demographics and the natural interest rate in the euro area

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  • Bielecki, Marcin
  • Brzoza-Brzezina, Michał
  • Kolasa, Marcin

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 as aging in Europe has been similar to that in the rest of the world so far. 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 the decline in NRI 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

  • Bielecki, Marcin & Brzoza-Brzezina, Michał & Kolasa, Marcin, 2020. "Demographics and the natural interest rate in the euro area," European Economic Review, Elsevier, vol. 129(C).
  • Handle: RePEc:eee:eecrev:v:129:y:2020:i:c:s0014292120301665
    DOI: 10.1016/j.euroecorev.2020.103535
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    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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    Cited by:

    1. Lucas Marc Fuhrer & Nils Herger, 2021. "Real interest rates and demographic developments across generations: A panel-data analysis over two centuries," Working Papers 2021-07, Swiss National Bank.
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    3. Jacopo Bonchi & Giacomo Caracciolo, 2021. "Declining natural interest rate in the US: the pension system matters," Temi di discussione (Economic working papers) 1317, Bank of Italy, Economic Research and International Relations Area.

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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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