Interest Rate Effects of Demographic Changes in a New Keynesian Life-Cycle Framework

Kara, Engin; Thadden, Leopold von

doi:10.1017/s1365100514000273

Cited by 63 publications

(89 citation statements)

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“…For example, there is a negative long run correlation between the safe rate and the fraction of the population aged 40-64 and a positive long run correlation between the safe rate and the dependency ratio (percentage less than 20 or older than 65). These two results are consistent with much recent literature that points to working age population growth and age distributions as major factors in our current run of low safe real rates (Gagnon et al (2016), Kara and von Thadden (2016)). …”

Section: Introductionsupporting

confidence: 93%

“…2 Kara and von Thadden's (2016) numerical results illustrate that the positive relationship also obtains in Blanchard's (1985) and Gertler's (1999) multiperiod finite lived model. Those models typically have labor inelastically supplied.…”

Section: Aggregate Savings and Investmentmentioning

confidence: 69%

“…We are not aware of previous reduced form research that has quantified a link between labor hours growth and r. However, changes in trend employment growth associated with demographic change are important for understanding real interest rate trends in the structural models of Gagnon et al (2016) and Kara and von Thadden (2016). As well, the informal calibration in Bullard (2017) uses trend labor force growth as one of the determinants of trend r.…”

Section: Aggregate Savings and Investmentmentioning

confidence: 99%

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Some Evidence on Secular Drivers of US Safe Real Rates

Lunsford

West²

2017

Working Paper (Federal Reserve Bank of Cleveland)

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We study long-run correlations between safe real interest rates in the United States and over 20 variables that have been hypothesized to infl uence real rates. The list of variables is motivated by the familiar intertermporal IS equation, by models of aggregate savings and investment, and by reduced form studies. We use annual data, mostly from 1890 to 2016. We fi nd that safe real interest rates are correlated as expected with demographic measures. For example, the longrun correlation with labor force hours growth is positive, which is consistent with overlapping generations models. For another example, the long-run correlation with the proportion of 40-to 64-year-olds in the population is negative. This is consistent with standard theory where middle-aged workers are high-savers who drive down real interest rates. In contrast to standard theory, we do not fi nd productivity to be positively correlated with real rates. Most other variables have a mixed relationship with the real rate, with long-run correlations that are statistically or economically large in some samples and by some measures but not in others.

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Section: Introductionsupporting

confidence: 93%

Section: Aggregate Savings and Investmentmentioning

confidence: 69%

Section: Aggregate Savings and Investmentmentioning

confidence: 99%

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Some Evidence on Secular Drivers of US Safe Real Rates

Lunsford

West²

2017

Working Paper (Federal Reserve Bank of Cleveland)

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“…Hence lower population and productivity growth interact with deleveraging to push the natural interest rate downwards, and for a given inflation rate and nominal and real wage rigidities, to increase unemployment and make it persist at high levels. In some sense, this interaction connects the literature on the effects of demographic changes on interest rates and on inflation (see Kara andvon Thadden, 2014, andCarvalho andFerrero, 2014) with papers looking at the effects of deleveraging shocks (Guerrieri and Lorenzoni, 2012, Eggertsson and Krugman, 2012, and Huo and Rios-Rull, 2013).…”

Section: Introductionmentioning

confidence: 59%

Long-Lasting Consequences of the European Crisis

Jimeno

2015

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu Terms of use: Documents in Working Paper SeriesLong-lasting consequences of the European crisis AbstractThe Great Recession and the subsequent European crisis may have long-lasting effects on aggregate demand, aggregate supply, and, hence, on macroeconomic performance over the medium and long-run. Besides the fact that financial crisis last longer and are succeeded by slower recoveries, and apart from the hysteresis effects that may operate after episodes of long-term unemployment, the combination of high (public and private) debt and low population and productivity growth may create significant constraints for monetary and fiscal policies. In this paper I develop an OLG model, one earlier used by Eggertsson and Mehrotra (2014) to rationalize the "secular stagnation hypothesis", to show how high debt, and low population and productivity growth may condition the macroeconomic performance of some European countries over the medium and long-run.JEL Codes: E20, E43, E52, E66 Keywords: natural rate of interest, zero lower bound, population and productivity growth, inter-generational transfers, secular stagnation.ECB Working Paper 1832, July 2015 1 Non-Technical SummaryAlmost eight years after the financial turmoil that signalled the start of the recent economic crisis, GDP and employment are still below their pre-crisis levels in many European countries. Slow and jobless recoveries, if they may even be termed recoveries, are being observed throughout Europe. In broader terms, the economic literature approaches the causes of these slow recoveries by: i) addressing the financial origins of the crisis, ii) emphasising transmission mechanisms through which temporary negative shocks may have long-lasting effects, and iii) revisiting the "secular stagnation hypothesis", that hints at the possibility that a temporary deleveraging shock yields a permanent liquidity trap in which demand is permanently too low and real interest rates sufficiently negative for monetary policy to be permanently constrained by the Zero Lower Bound on policy interest rates.Indeed, the European economy has to face the legacy of the Great Recession in a low growth scenario, due to population ageing, and diminished expectations of productivity growth. Moreover, demographic prospects may have significant economic consequences, affecting to patterns of consumption and potential growth (both through employment and TFP growth). This paper shows how the interaction of the legacy of...

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“…We build on the overlapping generations framework of Gertler (1999), who introduces lifecycle behaviour in a business cycle model. The production sectors of our model are inspired by Kara and von Thadden (2016) and incorporate investment adjustment costs, imperfect competition in the retail sector and nominal Calvo (1983)-pricing rigidities. As a novelty, we extend the pension fund framework of Romp (2013) and incorporate it into our model.…”

Section: Introductionmentioning

confidence: 99%

Pension Fund Restoration Policy in General Equilibrium

Kastelein

Romp

2018

SSRN Journal

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When the financial positions of pension funds worsen, regulations prescribe that pension funds reduce the gap between their assets (invested contributions) and their liabilities (accumulated pension promises). This paper quantifies the business cycle effects and distributional implications of various types of restoration policies. We extend a canonical New-Keynesian model with a tractable demographic structure and, as a novelty, a flexible pension fund framework. Fund participants accumulate real or nominal benefits and funding adequacy is restored by revaluing previously accumulated pension wealth (Defined Contribution) or changing the pension fund contribution rate on labour income (Defined Benefit). Generally, economies with Defined Contribution pension funds respond similarly to adverse capital quality shocks as economies without pension funds. Defined Benefit pension funds, however, distort labour supply decisions and exacerbate economic fluctuations. Retirees prefer Defined Benefit over Defined Contribution funds in case they face deficits, while the current and future working population prefers the opposite.JEL classification: J32, E32, D91, E21

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Interest Rate Effects of Demographic Changes in a New Keynesian Life-Cycle Framework

Abstract: 4Non-technical summary 5

Cited by 63 publications

References 30 publications

Some Evidence on Secular Drivers of US Safe Real Rates

Some Evidence on Secular Drivers of US Safe Real Rates

Long-Lasting Consequences of the European Crisis

Pension Fund Restoration Policy in General Equilibrium

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