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Demographics and Real Interest Rates Across Countries and Over Time

Author

Listed:
  • 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 structure 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.

Suggested Citation

  • Carlos Carvalho & Andrea Ferrero & Felipe Mazin & Fernanda Nechio, 2023. "Demographics and Real Interest Rates Across Countries and Over Time," Working Paper Series 2023-32, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:97243
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    References listed on IDEAS

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    More about this item

    Keywords

    life expectancy; population growth; demographics; real interest rates; neutral rate; capital flows; secular stagnation;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts
    • A11 - General Economics and Teaching - - General Economics - - - Role of Economics; Role of Economists

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