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Demographics and the natural real interest Rate: historical and projected paths for the euro area

Andrea Papetti

Journal of Economic Dynamics and Control, 2021, vol. 132, issue C

Abstract: This paper employs a large-scale overlapping generation model quantifying that demographics account for a decrease in the natural real interest rate of about 1.4 percentage points in the euro area compared with the average for the 1980s to 2030 (roughly at its trough), under the baseline calibration. Two channels prevail in providing the downward impact: the increasing scarcity of effective labor input and the growing willingness of individuals to save due to longer life expectancy. Mitigating factors are: greater substitutability between labor and capital, higher intertemporal elasticity of substitution in consumption, higher productivity and participation by older individuals and, to a lesser extent, a higher retirement age. Absent pay-as-you-go pension systems, the natural rate would stand at a lower level of about 0.5 percentage points by 2030. The simulated paths of the natural real interest rate and output growth are consistent with econometric estimates.

Keywords: Population aging; Natural interest rate; Secular stagnation; Overlapping generations (search for similar items in EconPapers)
JEL-codes: E17 E21 E43 E52 J11 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Demographics and the natural real interest rate: historical and projected paths for the euro area (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:132:y:2021:i:c:s0165188921001445

DOI: 10.1016/j.jedc.2021.104209

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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