Demographics and the Natural Rate of Interest in Japan
32 Pages Posted: 8 Apr 2019
Date Written: February 2019
Japan's aging and shrinking population could lower the natural rate of interest and, together with low inflation expectations, challenge the Bank of Japan's efforts to reflate the economy. This paper uses a semi-structural model to estimate the impact of demographics on the natural rate in Japan. We find that demographic change has a significantly negative impact on the natural rate by lowering trend potential growth. We also find that the negative impact has been increasing over time amid stronger demographic headwinds. These findings highlight the importance of boosting potential growth to offset the negative demographic impact and lift the natural rate in Japan.
Keywords: Real interest rates, Negative interest rates, Interest rate policy, Economic growth, Interest rate increases, Demographic change, natural rate of interest, monetary policy, Japan, natural rate, Turunen, potential growth, Pescatori, real interest rate
JEL Classification: C11, C32, E43, E52, E01, G21, E2, O4
Suggested Citation: Suggested Citation