On Secular Stagnation and Low Interest Rates: Demography Matters
36 Pages Posted: 12 Oct 2017
Date Written: September 27, 2017
Nominal and real interest rates in advanced economies have been decreasing since the mid-1980s and reached historical lows in the aftermath of the global financial crisis. Understanding why interest rates have fallen is essential for both monetary policy and financial stability. This paper focuses on one of the factors put forward in the literature within the secular stagnation view: adverse demographic developments. The main conclusion that we draw from the empirical analysis is that these developments have exerted downward pressure on real short- and long-term interest rates in the euro area over the past decade. Moreover, building on the European Commission’s projections for dependency ratios until 2025, we illustrate that the foreseen changes in the age structure of the population may dampen economic growth and continue exerting downward pressure on real interest rates in the future.
Keywords: secular stagnation, demographic developments, real interest rates, monetary policy
JEL Classification: C32, E52, J11
Suggested Citation: Suggested Citation