Capital Will Not Become More Expensive as the World Ages

44 Pages Posted: 20 Apr 2016

See all articles by Maurizio Bussolo

Maurizio Bussolo

World Bank - Chief Economist Office for Europe and Central Asia

Jamus Jerome Lim

World Bank

Maryla Maliszewska

World Bank

Hans Timmer

World Bank

Date Written: July 1, 2014

Abstract

Aging of populations and convergence between developed and developing countries in per capita incomes are shaping the evolution of saving, investment, capital flows, and, in particular, the cost of capital. When considering these trends, the existing literature argues for either continued, low interest rates, or sharply rising ones. This paper presents an alternative view: modest rises in interest rates, which result from a combination of increases in the global weight of high-saving developing economies (limiting declines in global saving), and decelerations in the rate of growth in developing countries (constraining upward pressure in global investment). For the majority of countries, slowing capital demand resulting from decelerating growth, coupled with structural changes that influence its attractiveness as a destination for capital, moderate increases in interest rates. Changes in key assumptions do not alter this view. More specifically, the small rise in interest rates persists even in a scenario where growth in developing countries decelerates more slowly, or when elasticities governing the behavior of saving and investment are varied.

Keywords: Economic Theory & Research, Industrial Economics, Consumption, Fiscal & Monetary Policy, Economic Growth

Suggested Citation

Bussolo, Maurizio and Lim, Jamus Jerome and Maliszewska, Maryla and Timmer, Hans, Capital Will Not Become More Expensive as the World Ages (July 1, 2014). World Bank Policy Research Working Paper No. 6989. Available at SSRN: https://ssrn.com/abstract=2475076

Maurizio Bussolo (Contact Author)

World Bank - Chief Economist Office for Europe and Central Asia ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://https://blogs.worldbank.org/team/maurizio-bussolo

Jamus Jerome Lim

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Maryla Maliszewska

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Hans Timmer

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

HOME PAGE: http://econ.worldbank.org/staff/htimmer

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