Ageing populations and real interest rates

Ageing in advanced countries

Projected population changes
OADR=ratio of over-65s to 20-64 year olds

Characteristics of ageing populations

Demographics can explain 75{5e7f07e14add20b2e04f4edb85a447d3cd8121fc27b809645e9fed603c22cc5c}, according to Holston et al. (2017), or 45{5e7f07e14add20b2e04f4edb85a447d3cd8121fc27b809645e9fed603c22cc5c} according to Rachel and Smith (2015), of the real interest rate decrease which took place during the 1980 – 2015 period.

Demographic trends and the real interest rate
Authors: Noëmie Lisack, Rana Sajedi, Gregory Thwaites
From: Bank of England

The three channels demographics affect real interest rates

According to Carvalho and al.: a) increases in longevity put downward pressure on the real interest rate because people start saving more in anticipation of a longer retirement period putting; as population growth decreases b) capital per worker rises leading to a lower real interest rate through a reduction in the marginal product of capital; and c) retirees save less than younger people lowering the aggregate savings rate and pushing the real interest rate higher.
Demographics and Real Interest Rates: Inspecting the Mechanism
Authors: Carlos Carvalho, Andrea Ferrero, Fernanda Nechio
From: PUC-Rio, Oxford University, FRB San Francisco

Going forward

About 270 out of the 640 basis points decline in real interest rates during this period [the last 50 years] was attributed to declining labor inputs and higher saving, which themselves stemmed from the lower fertility rate and increased life expectancy. As for the next 50 years, we find that demographic changes alone will not substantially increase or decrease the real interest rate from the current level.

Population Aging and the Real Interest Rate in the Last and Next 50 Years – A tale told by an OverlappingGenerations Model
Authors: Nao Sudo, Yasutaka Takizuka
From: Bank of Japan