Template-Type: ReDIF-Paper 1.0 
Title: Demographics and the natural interest rate in the euro area
Author-Name: Marcin Bielecki 
Author-Name: Michał Brzoza-Brzezina 
Author-Name: Marcin Kolasa 
Abstract: We investigate the impact of demographics on the natural rate of interest (NRI) in the euro area, with a particular focus on the role played by economic openness, migrations and pension system design. To this end, we construct a life-cycle model and calibrate it to match the life-cycle profiles from HFCS data. We show that population aging contributes significantly to the decline in the NRI, explaining about two-thirds of its secular decline between 1985 and 2030. Openness to international capital flows has not been important in driving the EA real interest rate so far, but will become a significant factor preventing its further decline in the coming decades, when aging in Europe accelerates relative to the rest of the world. Of two possible pension reforms, only an increase in the retirement age can revert the downward trend on the equilibrium interest rate while a fall in the replacement rate would make its fall even deeper. The demographic pressure on the Eurozone NRI can be alleviated by increased immigration, but only to a small extent and with a substantial lag.
Number: 2020-050
Length: 39 pages 
Creation-Date: 2020-06
Keywords: population aging, natural interest rate, life-cycle models, pension systems, migrations
Classification-JEL: E31, E52, J11
File-URL: https://hdl.handle.net/20.500.12182/1103
File-Format: Application/pdf
DOI: 10.33119/kaewps2020050
Handle: RePEc:sgh:kaewps:2020050