Demography and equilibrium interest rates: Competing approaches and evidence from Russia

We consider two approaches to estimate the impact of demographics on short- and long-run equilibrium interest rates. Under the traditional approach, the equilibrium rate is determined by the dynamics of 'real' variables, and demographic factors affect the long-term equilibrium rate through the balance between savings and investment. The observed global decline in real rates is partly explained by the demographic trends: slowdown in population growth and its aging. According to the macro-financial approach, which was actively developed in recent years by researchers of the Bank for International Settlements, the traditional view overestimates the extent of the decline in (real) equilibrium rates. The proponents of the macro-financial approach believe that, given the financial cycle, the decline in long-term equilibrium rate is less pronounced, as it is mainly driven by monetary policy regimes rather than by 'real' factors. Moreover, the mentioned demographic trends affect the financial cycle as well, so they indirectly affect short-term equilibrium (neutral) rates according to the macro-financial approach as well. Historically, for Russia, as a major energy exporter, the factors of the real economy (and thus the traditional approach) are more important. As the financial sector develops, the macro-financial approach becomes more relevant. Nevertheless, the estimates of the dynamics of the long-term equilibrium rate within the framework of both traditional and macro-financial approaches for Russia will be close to each other.