Abstract
This paper employs a large-scale overlapping generation model quantifying that demographics account for a decrease in the natural real interest rate of about 1.4 percentage points in the euro area compared with the average for the 1980s to 2030 (roughly at its trough), under the baseline calibration. Two channels prevail in providing the downward impact: the increasing scarcity of effective labor input and the growing willingness of individuals to save due to longer life expectancy. Mitigating factors are: greater substitutability between labor and capital, higher intertemporal elasticity of substitution in consumption, higher productivity and participation by older individuals and, to a lesser extent, a higher retirement age. Absent pay-as-you-go pension systems, the natural rate would stand at a lower level of about 0.5 percentage points by 2030. The simulated paths of the natural real interest rate and output growth are consistent with econometric estimates.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
