Discussion paper

DP18616 Demographics and Real Interest Rates Across Countries and Over Time

We explore the implications of demographic trends for the evolution of real interest rates across countries and over time. To that end, we develop a tractable three-country general equilibrium model with imperfect capital mobility and country-specific demographic trends. We calibrate the model to study how low-frequency movements in a country's real interest rate depend on its own and other countries' demographic factors, given a certain degree of financial integration. The more financially integrated a country is, the higher the sensitivity of its real interest rate to global developments is, and the less its own real rate determinants matter. We then estimate panel error-correction models relating real interest rates to many of its possible determinants—demographics included—imposing some restrictions motivated by lessons from our structural model. Results corroborate the importance of accounting for time-varying financial integration, and show global factors and life expectancy are relevant determinants of real interest rates.


Carvalho, C, A Ferrero, F Mazin and F Nechio (2023), ‘DP18616 Demographics and Real Interest Rates Across Countries and Over Time‘, CEPR Discussion Paper No. 18616. CEPR Press, Paris & London. https://cepr.org/publications/dp18616