Demographics and Real Interest Rates Across Countries and Over Time

Carlos Carvalho, Andrea Ferrero, Felipe Mazin and Fernanda Nechio

No 18616, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: E52 E58 J11 (search for similar items in EconPapers)
Date: 2023-11
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