Interest Rates and Population

Abstract

Recent papers consider the relationship between population growth and capital accumulation. In general the relationship is not monotonic; there is a tension between two opposing effects - a higher growth rate diluting capital that has already been accumulated, and the ability of a growing population to generate its own wealth. The strengths of these effects depends on the population structure and the time horizon for each generation to accumulate wealth.This type of analysis has been conducted within an Overlapping Generations framework. However an explicit assumption is needed to allow a comparative static analysis of levels of population growth and capital accumulation. That assumption is effectively the requirement for each generation to be self supporting in terms of its consumption and contribution to production.We show that this assumption can be justified in theory by a form of economic efficiency with respect to population changes, referred to as demographic efficiency. This analysis is also conducted within the Overlapping Generations model. Thus we provide necessary and sufficient conditions for such efficiency in terms of each generation’s lifetime consumption and contribution to production.The main result of this paper is that there must be an intimate relationship, under general conditions, between long term real interest rates and long term demographic trends.