The wealth distribution effect leads to lower interest rates
Auclert et al. in this paper use a shift-share approach to quantify the general equilibrium effects of population aging on wealth accumulation, real interest rates, and capital flows. In particular, they combine population projections with household surveys from the United States and twenty four other countries to study how the wealth-to-output ratio evolves as population ages. For example, the ratio is increasing in the US where, 70-year-olds are on average about four times wealthier than 40-year-olds, and earn about four times less in labor income. Their model predicts that:
- Demographics will continue putting downward pressure on interest rates. According to their calculations, the decline ranges from 36 basis points to 100 basis points in 2100, and depends on the values of intertemporal substitution elasticities that are plausible in light of the literature.
- Global imbalances will reach very high levels by the end of the twenty-first century, driven by the future aging of China and India. In short, the “global savings glut” has just begun.
Demographics, Wealth, and Global Imbalances in the Twenty-First Century
Authors: Adrien Auclert, Hannes Malmberg, Frédéric Martenet, Matthew Rognlie
From: Stanford University, University of Minnesota, Northwestern University
The shrinking of the global labor force effect leads to higher interest rates
Global population growth currently stands at 1.25% and is expected to decline further to 0.75% by 2040, according to the United Nations. For advanced economies population growth is expected to reach 0% by 2040. As a result the dependency ratio – the ratio of workers to the elderly in the population – will worsen rapidly. We are at a point of inflection, argue Goodhart and Pradhan, where population ageing, contrary to the conclusion reached by Auclert et al. above, will result in higher interest rates and inflation.
- Ageing will lead to lower both desired savings and desired investment, but desired savings will fall by more. The resulting imbalance will require the real interest rate to rise for the market to clear.
- The worsening dependency ration will lead to higher tax rates on workers in order to generate transfers from workers to the elderly. But labor scarcity will put workers in a stronger bargaining position to demand higher wages. This is a recipe for resurging inflationary pressures.
Demographics will reverse three multi-decade global trends
Authors: Charles Goodhart, Manoj Pradhan
From: London School of Economics, Talking Heads Macro
