On secular stagnation and low interest rates: Demography matters

Abstract

Nominal and real interest rates in advanced economies have been declining since the mid‐1980s and reached historically low levels after the outbreak of the global financial crisis. Understanding why interest rates have fallen is of utmost importance for monetary policy. This paper focuses on one of the factors contained within the ‘secular stagnation’ view: adverse demographic developments. The empirical analysis shows that these developments have exerted a downward pressure on real interest rates in the euro area in the last decade. Building on the projections of the dependency ratios produced by the European Commission, we show that the foreseen changes in the age composition of the population may continue exerting downward pressure on real interest rates.

More Gray, More Volatile? Aging and (Optimal) Monetary Policy

“…Particularly, Table 2 shows the SS comparison of a young and an old society when the old-age dependency ratio increases from 20 to 80 percent over a 50-year horizon, while Figure 1 12 the transition path between the two SS-s. This exercise gives an opportunity to point out that the long-run properties of our model are consistent with those of the secular stagnation literature, such as Summers (2014), Favero and Galasso (2015), Eggertsson, Mehrotra, and Robbins (2017), Ferrero, Gross, and Neri (2017), or Jones (2018). At the same time, the PAYG pension system is required to provide a higher amount of pension benefits which can be financed by taxes deducted from the young workers.…”

“…5 The above examples highlight the steady interest of central bankers in population aging, a long way back. Relatedly, there are numerous empirical and theoretical papers which discuss the longer-term monetary (inflation rate, but not inflation volatility) and interest rate implications of aging, particularly, according to the secular stagnation literature slower economic growth is coupled with a fall in the natural rate of interest (examples include Summers (2014), Favero and Galasso (2015), Eggertsson, Mehrotra, and Robbins (2017), Ferrero, Gross, and Neri (2017) and Jones (2018)). 6 There are also many works which talk about the shorter-term behavior of the macroeconomy and monetary policy transmission (but not based on a multi-period general equilibrium framework with overlapping generations) which we will discuss as next, however, we are not aware of any papers on the interplay between aging and optimal monetary policies.…”

Demographic Headwinds in Central and Eastern Europe

“…For example, simulations by Gagnon, Johannsen, and Lopez-Salido (2016) find that most of the decline in real rates since 1980 can be accounted for by demographic trends. Panel regressions using euro area data find similar results (Ferrero, Gross, and Neri 2017). The simulation results shown in Chapter 6 also show declining real interest rates.…”

Global Trends in Interest Rates

“…The aim of the rest of this paper is to identify some of the potential drivers of the trend in the world real interest rate. A growing literature finds a connection between demographics and low-frequency movements in interest rates (e.g., Aksoy et al, 2015;Carvalho et al, 2016;Favero et al, 2016;Gagnon et al, 2016;Eggertsson et al, 2017;Ferrero et al, 2017).…”

“…3 Other recent work stressing the role of demographics in the movements of interest rates includes Aksoy et al (2015), Favero et al (2016), Carvalho et al (2016), Gagnon et al (2016), and Ferrero et al (2017). 4 Recent work estimating variants of r * with data from the United States includes Justiniano and Primiceri (2010), Barsky et al (2014), Curdia et al (2015), Kiley (2015), Lubik and Matthes (2015), Pescatori and Turunen (2015), Christensen and Rudebusch (2017), Crump et al (2016), Johannsen and Mertens (2016), and Koenig and Armen (2017).…”