Ageing, interest rates, and financial flows
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.
|Date of creation:||31 Aug 2005|
|Date of revision:|
|Note:||Type of Document - pdf; pages: 33. Bank of Finland Research Discussion Papers 2/2005|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert E. Hall, 1981.
"Intertemporal Substitution in Consumption,"
NBER Working Papers
0720, National Bureau of Economic Research, Inc.
- Sinn, Hans-Werner & Uebelmesser, Silke, 2003.
"Pensions and the path to gerontocracy in Germany,"
Munich Reprints in Economics
19563, University of Munich, Department of Economics.
- Hans Fehr & Sabine Jokisch & Laurence Kotlikoff, 2003.
"The Developed World's Demographic Transition - The Roles of Capital Flows, Immigration, and Policy,"
NBER Working Papers
10096, National Bureau of Economic Research, Inc.
- Hans Fehr & Sabine Jokisch & Larry Kotlikoff, 2003. "The Developed World's Demographic Transition - the Roles of Capital Flows, Immigration, and Policy," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-133, Boston University - Department of Economics.
- 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.
- John Geanakoplos & Michael Magill & Martine Quinzii, 2002. "Demography and the Long-run Predictability of the Stock Market," Cowles Foundation Discussion Papers 1380R, Cowles Foundation for Research in Economics, Yale University, revised Jul 2004.
- John Geanakoplos & Michael Magill & Martine Quinzii, 2002. "Demography and the Long-run Predictability of the Stock Market," Cowles Foundation Discussion Papers 1380, Cowles Foundation for Research in Economics, Yale University.
- Guvenen, Fatih, 2006.
"Reconciling conflicting evidence on the elasticity of intertemporal substitution: A macroeconomic perspective,"
Journal of Monetary Economics,
Elsevier, vol. 53(7), pages 1451-1472, October.
- Fatih Guvenen, 2005. "Reconciling Conflicting Evidence on the Elasticity of Intertemporal Substitution: A Macroeconomic Perspective," Macroeconomics 0507005, EconWPA.
- M. Fatih Guvenen, 2002. "Reconciling Conflicting Evidence on the Elasticity of Intertemporal Substitution: A Macroeconomic Perspective," RCER Working Papers 491, University of Rochester - Center for Economic Research (RCER), revised Mar 2003.
- Miles, David K, 1997.
"Modelling the Impact of Demographic Change Upon the Economy,"
CEPR Discussion Papers
1762, C.E.P.R. Discussion Papers.
- Miles, David, 1999. "Modelling the Impact of Demographic Change upon the Economy," Economic Journal, Royal Economic Society, vol. 109(452), pages 1-36, January.
- Börsch-Supan, Axel H. & Heiss, Florian & Ludwig, Alexander & Winter, Joachim, 2003.
"Pension reform, capital markets and the rate of return,"
Munich Reprints in Economics
20200, University of Munich, Department of Economics.
- 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, 05.
- Florian Heiss & Alexander Ludwig & Joachim Winter, 2002. "Pension reform, capital markets, and the rate of return," MEA discussion paper series 02023, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
- Börsch-Supan, Axel & Heiss, Florian & Winter, Joachim, 2000. "Pension reform, capital markets, and the rate of return," Discussion Papers 589, Institut fuer Volkswirtschaftslehre und Statistik, Abteilung fuer Volkswirtschaftslehre.
- James Poterba, 2004.
"The Impact of Population Aging on Financial Markets,"
NBER Working Papers
10851, National Bureau of Economic Research, Inc.
- 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.
- Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpla:0508015. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.