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Declining natural interest rate in the US: the pension system matters

Author

Listed:
  • Jacopo Bonchi

    (LUISS)

  • Giacomo Caracciolo

    (Bank of Italy)

Abstract

The natural interest rate is the level of the real interest rate compatible with potential output and stable prices. We develop a life-cycle model and calibrate it to the US economy to quantify the role of the public pension scheme for the past and future evolution of the natural interest rate. Between 1970 and 2015, the pension reforms have overall mitigated the secular decline in the natural interest rate, raising it by around one percentage point and thus counteracting the downward pressure from adverse demographic and productivity patterns. As regards the future, we simulate the effects of the demographic trends, expected between 2015 and 2060, combined with alternative pension reforms and productivity growth scenarios. We rank the different policy options according to a welfare criterion and study the implications for the natural interest rate. A reduction in the replacement rate outperforms, in terms of welfare, an increase in the contribution rate in the “normal growth” scenario and vice versa in the “stagnant growth” case.

Suggested Citation

  • 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.
    • Handle: RePEc:bdi:wptemi:td_1317_21
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    More about this item

    Keywords

    natural interest rate; pensions; population ageing; secular stagnation; demography; social security;
    All these keywords.

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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