Working Paper: CEPR ID: DP18616
Authors: Carlos Carvalho; Andrea Ferrero; Felipe Mazin; Fernanda Nechio
Abstract: We explore the implications of demographic trends for the evolution of real interest rates across countries and over time. To that end, we develop a tractable three-country general equilibrium model with imperfect capital mobility and country-specific demographic trends. We calibrate the model to study how low-frequency movements in a country's real interest rate depend on its own and other countries' demographic factors, given a certain degree of financial integration. The more financially integrated a country is, the higher the sensitivity of its real interest rate to global developments is, and the less its own real rate determinants matter. We then estimate panel error-correction models relating real interest rates to many of its possible determinants—demographics included—imposing some restrictions motivated by lessons from our structural model. Results corroborate the importance of accounting for time-varying financial integration, and show global factors and life expectancy are relevant determinants of real interest rates.
Keywords: demographics; life expectancy; population growth; demographic transition; real interest rate; neutral rate; imperfect capital mobility; capital flows; secular stagnation
JEL Codes: E52; E58; J11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demographic factors (J11) | real interest rates (E43) |
| financial integration (F30) | sensitivity of real interest rates to global demographic trends (J11) |
| financial integration (F30) | relevance of domestic demographic determinants (J11) |
| global demographic trends (J11) | real interest rates (E43) |
| life expectancy (J17) | real interest rates (E43) |
| demographic shifts (J11) | decline in real interest rates in advanced economies (E43) |