Understanding the New Normal: The Role of Demographics

Gagnon, Etienne; Johannsen, Benjamin K.; López‐Salido, David

doi:10.17016/feds.2016.080

Cited by 106 publications

(89 citation statements)

References 51 publications

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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%

“…An increase in the dependency ratio will shift the savings schedule in, thus raising r (Gagnon et al (2016)); an increase of the fraction middle aged will work in the opposite direction. Geanakoplos et al (2004) argue that changes in what they call the middle to young ratio will be positively correlated with r; we conclude from their study that the change in the fraction middle aged will also be positively correlated with r.…”

Section: Aggregate Savings and Investmentmentioning

confidence: 99%

“…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%

See 2 more Smart Citations

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: 99%

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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“…In particular, although our measure of the real rate fluctuated a bit at the start of the Financial Crisis, our average r real-side fundamentals such as changing demographics (e.g., Carvalho et al 2016, Favero et al 2016, and Gagnon et al 2016.…”

Section: Projections Of the Natural Ratementioning

confidence: 97%

" A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt"

Christensen¹,

Rudebusch²

2018

ERWP

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Researchers have debated the extent of the decline in the steady-state short-term real interest rate-that is, in the so-called equilibrium or natural rate of interest. We examine this issue using a dynamic term structure finance model estimated directly on the prices of individual inflation-indexed bonds with adjustments for real term and liquidity risk premiums. Our methodology avoids two pitfalls of previous macroeconomic analyses: structural breaks at the zero lower bound and potential misspecification of output and inflation dynamics. We estimate that the equilibrium real rate has fallen about 2 percentage points and appears unlikely to rise quickly.JEL Classification: C32, E43, E52, G12

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“…A striking feature of this literature is that each contribution tends to find that the factors emphasized in their study can completely account for the decline in the equilibrium real interest rate: Gagnon, Johanssen, andLopez-Salido, 2016 andEggertsson, Mehrotra, andRobbins (2017) attribute all (or more than all) of the decline in the equilibrium real interest rate to demographic and productivity factors, whereas Del Negro et al (2017) emphasize safety/liquidity premiums as the only sizable driver.…”

mentioning

confidence: 99%

Monetary Policy in a Low Interest Rate World

Kiley¹,

Roberts²

2017

FEDS

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Nominal interest rates may remain substantially below the averages of the last half-century, as central bank's inflation objectives lie below the average level of inflation and estimates of the real interest rate likely to prevail over the long run fall notably short of the average real interest rate experienced over this period. Persistently low nominal interest rates may lead to more frequent and costly episodes at the effective lower bound (ELB) on nominal interest rates. We revisit the frequency and potential costs of such episodes in a low-interest-rate world in a dynamic-stochastic-general-equilibrium (DSGE) model and large-scale econometric model, the FRB/US model. Several conclusions emerge. First, monetary policy strategies based on traditional policy rules lead to poor economic performance when the equilibrium interest rate is low, with economic activity and inflation more volatile and systematically falling short of desirable levels. Moreover, the frequency and length of ELB episodes under such policy approaches is significantly higher than in previous studies. Second, a risk-adjustment to a simple rule in which monetary policymakers are more accommodative, on average, than prescribed by the rule ensures that inflation achieves its 2 percent objective and requires that policymakers aim at inflation near 3 percent when the ELB is not binding. Third, commitment strategies in which monetary accommodation is not removed until either inflation or economic activity overshoot their long-run objectives are very effective in both the DSGE and FRB/US model. Finally, our results suggest that the adverse effects associated with the ELB may be substantial at inflation targets near 2 percent if r* is low and monetary policy follows a traditional policy approach. Whether such adverse effects could justify a higher inflation target depends on whether monetary policy strategies substantially different from traditional approaches are feasible and an assessment of the effects of the inflation target on economic welfare. ACKNOWLEDGMENTS

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Understanding the New Normal: The Role of Demographics

Cited by 106 publications

References 51 publications

Some Evidence on Secular Drivers of US Safe Real Rates

Some Evidence on Secular Drivers of US Safe Real Rates

" A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt"

Monetary Policy in a Low Interest Rate World

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