Discussion Paper Details

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Title: Aging and the Real Interest Rate in Japan: A Labor Market Channel

Author(s): Shigeru Fujita and Ippei Fujiwara

Publication Date: May 2021

Keyword(s): aging, Japan and Real interest rate

Programme Area(s): International Macroeconomics and Finance and Monetary Economics and Fluctuations

Abstract: This paper explores a causal link between aging of the labor force and declining trends in the real interest rate in Japan. We develop a search/matching model that features heterogeneous workers with respect to their ages and firm-specific skills. Using the model, we examine the long-run implications of the sharp drop in labor force entry in the 1970s. We show that the changes in the demographic structure induce significant low-frequency movements in per capita consumption growth and the real interest rate. The model suggests that aging of the labor force accounts for 40 percent or more of the declines in the real interest rate observed between the 1980s and 2000s in Japan. We also examine the impacts of other long-term developments such as a slowdown of TFP growth and higher shares of female and non-regular workers.

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Bibliographic Reference

Fujita, S and Fujiwara, I. 2021. 'Aging and the Real Interest Rate in Japan: A Labor Market Channel'. London, Centre for Economic Policy Research.