What Explains the Decline in r*? Rising Income Inequality Versus Demographic Shifts

48 Pages Posted: 3 Sep 2021 Last revised: 5 Oct 2021

See all articles by Atif R. Mian

Atif R. Mian

Princeton University - Department of Economics; Princeton University - Princeton School of Public and International Affairs; NBER

Ludwig Straub

Harvard University - Department of Economics

Amir Sufi

University of Chicago - Booth School of Business; NBER

Date Written: September 22, 2021

Abstract

Downward pressure on the natural rate of interest (r*) is often attributed to an increase in saving. This study uses microeconomic data from the SCF+ to explore the relative importance of demographic shifts versus rising income inequality on the evolution of saving behavior in the United States from 1950 to 2019. The evidence suggests that rising income inequality is more important than the aging of the baby boom generation in explaining the decline in r*. Saving rates are significantly higher for high income households within a given birth cohort relative to other households in the same birth cohort, and there has been a large rise in income shares for high income households since the 1980s. The result has been a large rise in saving by high income earners since the 1980s, which is the exact same time period during which r* has fallen. Differences in saving rates across the working age distribution are smaller, and there has not been a consistent monotonic shift in income toward any given age group. Both findings challenge the view that demographic shifts due to the aging of the baby boom generation explain the decline in r*.

Suggested Citation

Mian, Atif R. and Straub, Ludwig and Sufi, Amir, What Explains the Decline in r*? Rising Income Inequality Versus Demographic Shifts (September 22, 2021). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2021-104, Available at SSRN: https://ssrn.com/abstract=3916345 or http://dx.doi.org/10.2139/ssrn.3916345

Atif R. Mian

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Princeton University - Princeton School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ludwig Straub

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

Amir Sufi (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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