Demographics could explain entire drop in real rate – Fed paper
Authors find ageing population can explain most – or even all – of the decline in the long-run rate
A "dramatic demographic transition" affecting the US can explain a large chunk of the decline in long-run real interest rates, authors from the US Federal Reserve have found.
In a working paper, Etienne Gagnon, Benjamin Johannsen and David Lopez-Salido find the ageing population accounts for a 1.25 percentage point decline in the real rate, which on some estimates accounts for the entire drop in recent years.
They base their results on an overlapping generation model, calibrated to account for
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