On Secular Stagnation and Low Interest Rates: Demography Matters

28 Pages Posted: 31 Jul 2017

See all articles by Giuseppe Ferrero

Giuseppe Ferrero

Bank of Italy

Marco Gross

International Monetary Fund (IMF); European Central Bank (ECB)

Stefano Neri

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: July 26, 2017

Abstract

Nominal and real interest rates in advanced economies have been decreasing since the mid-1980s and reached historical low levels in the aftermath of the global financial crisis. Understanding why interest rates have fallen is essential for both monetary policy and financial stability. This paper focuses on one of the factors that have been put forward in the literature within the secular stagnation view: adverse demographic developments. The main conclusion that we draw from our empirical, panel equation system-based assessment is that these developments have exerted downward pressures on real short- and long-term interest rates in the euro area over the past decade. Moreover, building on the European Commission projections for dependency ratios until 2025, we illustrate that the foreseen structural change in terms of age structure of the population may dampen economic growth and continue exerting downward pressure on real interest rates also in the future.

Keywords: secular stagnation; demographic developments; real interest rates; monetary policy

JEL Classification: C32; E52; J11

Suggested Citation

Ferrero, Giuseppe and Gross, Marco and Neri, Stefano, On Secular Stagnation and Low Interest Rates: Demography Matters (July 26, 2017). ECB Working Paper No. 2088. Available at SSRN: https://ssrn.com/abstract=3009653

Giuseppe Ferrero

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Marco Gross (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Stefano Neri

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy
+39 06 4792 2821 (Phone)

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