Ageing populations will keep interest rates low – BdF paper

The increase in elderly people in developed societies will continue to depress real interest rates, according to a working paper published by the Banque de France.

In Population ageing and the macroeconomy, Noëmie Lisack, Rana Sajedi and Gregory Thwaites use an overlapping generations model to examine key variables across richer countries. They find the fall in both birth and death rates in advanced economies explains a large proportion of the fall in real interest rates. The same factors also help to explain the rise in household debt and in house prices, the paper finds. 

“Since households maintain relatively high wealth levels throughout retirement, these trends will persist as population ageing continues,” the authors say. They find that countries where the population is ageing relatively slowly, like the US, “will increasingly accumulate net foreign liabilities”.

The authors also examine suggested policy responses to these trends. Many commentators have suggested raising the retirement age as a means of decreasing these effects of ageing on the economy. But the authors find that such a measure would have only “limited effects”. By contrast, the availability of housing as an alternative store of value “attenuates the fall in interest rates”, they say.