Demographic Changes and Neutral Interest Rates: Evidence from theWorld's Fastest-Aging Economy

Sangyup Choi and Hyunpyung Kim
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Hyunpyung Kim: University of Texas at Austin

No 2026rwp-292, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: This paper estimates Korea's long-run real neutral interest rate and quantifies the structural forces behind its decline since 1990. Using semiannual data for 12 advanced economies over 1990-2024, we estimate a cross-country panel state-space model that separates country-specific productivity and demographic trends from common global components. Korea's neutral rate falls from about 1.6% in 1990 to roughly 0.7% in 2024. The model attributes this decline mainly to slower trend productivity growth, the post-2014 reversal in the working-age population share, and spillovers from major advanced economies. Safe-asset market forces also contribute, but supply and demand effects partly offset each other. Counterfactual simulations suggest that removing global spillovers would raise the 2024 estimate by about 0.6 percentage points, while holding the working-age share at its 2014 level would raise it by about 0.5 percentage points. Conditional demographic scenarios imply continued downward pressure absent offsetting structural changes, highlighting implications for monetary policy space.

Keywords: Neutral interest rate; Demographic changes; Korean economy; Global spillovers; State space model (search for similar items in EconPapers)
JEL-codes: E43 E47 E58 F15 F62 (search for similar items in EconPapers)
Pages: 34pages
Date: 2026-06
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