Two papers on the demographics of wealth and the real interest rate decline

Intergenerational wealth inequality: the role of demographics

By António Antunes and Valerio Ercolani

During the last three decades in the US, the older part of the population has become significantly richer, in contrast with the younger part, which has not. We show that demographics account for a significant part of this intergenerational wealth gap rise. In particular, we develop a general equilibrium model with an OLG structure which is able to mimic the wealth distribution of the household sector in the late 1980s, conditional on its age structure. Inputting the observed rise of life expectancy and the fall in population growth rate into the model generates an increase in wealth inequality across age groups which is between one third and one half of that actually observed. Furthermore, the demographic factors help explain the change of the wealth concentration conditional on the age structure; for example, they account for more than one third of the rise of the share of the elderly within the top 5% wealthiest households. Finally, consistent with a stronger life-cycle motive and an increase of the capital-labor ratio, the model produces an interest rate fall of 1 percentage point.

Demographics and the natural interest rate in the euro area

By Marcin Bielecki, Michał Brzoza-Brzezina and Marcin Kolasa

We investigate the impact of demographics on the natural rate of interest (NRI) in the euro area, with a particular focus on the role played by economic openness, migrations and pension system design. To this end, we construct a life-cycle model and calibrate it to match the life-cycle profiles from HFCS data. We show that population aging contributes significantly to the decline in the NRI, explaining about two-thirds of its secular decline between 1985 and 2030. Openness to international capital flows has not been important in driving the EA real interest rate so far, but will become a significant factor preventing its further decline in the coming decades, when aging in Europe accelerates relative to the rest of the world. Of two possible pension reforms, only an increase in the retirement age can revert the downward trend on the equilibrium interest rate while a fall in the replacement rate would make its fall even deeper. The demographic pressure on the Eurozone NRI can be alleviated by increased immigration, but only to a small extent and with a substantial lag.

The game of various generations blaming each other for their lot can take a backseat. Simple demographics account for a lot of what they are arguing about. And, as argued before on this blog, real interest rates are decreasing, and this has nothing to do with policy.

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