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Ageing, interest rates, and financial flows

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  • Saarenheimo, Tuomas

Abstract

The median age of the global population is presently increasing by nearly three months every year.Over the next couple of decades, almost every country in the world is set to experience an unprecedented increase in the share of elderly population.This development has the potential to fundamentally affect the functioning of economic and financial systems globally.This study concentrates on the effects of ageing on the evolution of global interest rates and financial flows.The study uses a 73-cohort general equilibrium overlapping generations model of five major economic areas (USA, EU-15, Japan, China, and India).Utilising actual population data and UN population projections, the model yields predictions for major economic and financial variables up to 2050.The model predicts a decline in global equilibrium real interest rates over the next two decades, but the size of the decline depends crucially on the future evolution of public pension benefits.If the present generosity of pension systems is maintained - leading to a steep increase in the cost of the pension systems - the maximum decline of interest rates is projected to be about 70 basis points from present levels.If pension benefits are reduced to offset the increasing cost pressures, the decline in global equilibrium interest rates can be much larger, while increases in the retirement age work in the opposite direction.The results do not anticipate a 'financial market meltdown' - a collapse in asset prices associated with the retirement of the baby-boomers - predicted by some.On the contrary, bond prices should fare fairly well over the next three decades.The main reason for this is that increasing life expectancy at retirement creates a need for higher retirement saving - in the future, people will want to retire wealthier than they do today.This trend more than offsets the negative effect of the retirement of baby-boomers on asset demand.Key words: Ageing, real interest rates, financial flows, public pension systems JEL classification numbers: J11, E44

Suggested Citation

  • Saarenheimo, Tuomas, 2005. "Ageing, interest rates, and financial flows," Research Discussion Papers 2/2005, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:2005_002
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    References listed on IDEAS

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    1. James M. Poterba, 2004. "Impact of population aging on financial markets in developed countries," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 43-53.
    2. Axel Boersch-Supan & Florian Heiss & Alexander Ludwig & Joachim Winter, 2003. "Pension Reform, Capital Markets and the Rate of Return," German Economic Review, Verein für Socialpolitik, vol. 4(2), pages 151-181, May.
    3. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
    4. Author-Name: John Geanakoplos & Michael Magill & Martine Quinzii, 2004. "Demography and the Long-Run Predictability of the Stock Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(1), pages 241-326.
    5. Miles, David, 1999. "Modelling the Impact of Demographic Change upon the Economy," Economic Journal, Royal Economic Society, vol. 109(452), pages 1-36, January.
    6. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
    7. James M. Poterba, 2004. "The impact of population aging on financial markets," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 163-216.
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    Cited by:

    1. Heikki Oksanen, 2005. "Actuarial Neutrality across Generations Applied to Public Pensions under Population Ageing: Effects on Government Finances and National Saving," CESifo Working Paper Series 1501, CESifo Group Munich.
    2. Jesús Cuaresma & Ernest Gnan, 2007. "The natural rate of interest: which concept? which estimation method? which policy conclusions?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 29(4), pages 667-688.
    3. repec:onb:oenbwp:y::i:139:b:1 is not listed on IDEAS

    More about this item

    JEL classification:

    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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