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

Alan Taylor and Joseph Kopecky

No 14576, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 push the risk free rate further into negative territory, while the equity risk premium remains elevated.

Keywords: Life-cycle model; Olg model; Demographics; Rates of return; Safe assets; Risky assets; Secular stagnation (search for similar items in EconPapers)
JEL-codes: E21 E43 G11 J11 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-age, nep-dge, nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: The Murder-Suicide of the Rentier: Population Aging and the Risk Premium (2020)
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