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The Murder-Suicide of the Rentier: Population Aging and the Risk Premium

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  • Joseph Kopecky

    (Department of Economics, Trinity College Dublin)

  • Alan M. Taylor

    (Department of Economics and Graduate School of Management, University of California, Davis)

Abstract

Population aging has been linked to global declines in real interest rates. A similar trend is seen for equity risk premia, which are on the rise. An existing literature can explain part of the declining trend in safe rates using demographics, but has no mechanism to speak to trends in relative returns on different assets. We calibrate a heterogeneous agent life-cycle model with equity markets and aggregate risk, and we show that aging demographics can simultaneously account for both the majority of a downward trend in the risk free rate, while also increasing the return premium attached to risky assets. This is because the life-cycle savings dynamics that have been well documented exert less pressure on risky assets as older households shift away from risk. Under reasonable calibrations we find declines in the safe rate that are considerably larger than most existing estimates between the years 1990 and 2017. We are also able to account for most of the rise in the equity risk premium. Projecting forward to 2050 we show that persistent demographic forces will continue to push the risk free rate further into negative territory, while the equity risk premium remains elevated.

Suggested Citation

  • Joseph Kopecky & Alan M. Taylor, 2020. "The Murder-Suicide of the Rentier: Population Aging and the Risk Premium," Trinity Economics Papers tep1220, Trinity College Dublin, Department of Economics.
  • Handle: RePEc:tcd:tcduee:tep1220
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Murder-Suicide of the Rentier: Population Aging and the Risk Premium
      by Christian Zimmermann in NEP-DGE blog on 2020-04-20 14:54:02

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    More about this item

    Keywords

    life-cycle model; demographics; rates of return; safe assets; risky assets; secular stagnation;
    All these keywords.

    JEL classification:

    • 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
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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