We develop a tractable multicountry general equilibrium model with imperfect capital mobility to explore the implications of demographic trends for the evolution of real interest rates across countries and over time. We calibrate the model to study how the interaction of international financial integration and both domestic and foreign demographic developments shapes low-frequency movements in a country’s real interest rate. The key insight from the model is that the real interest rate in a more financially integrated country is relatively more sensitive to global developments than to domestic factors. We estimate panel error-correction models relating real interest rates to many of its possible drivers—demographics included—imposing some structure motivated by the lessons from the theory. The empirical results show that global factors and domestic demographic variables are robust determinants of real interest rates. Alternative specifications showcase the importance of accounting for time-varying financial integration and of controlling for a range of possible real rate drivers. Both the model and the empirical analysis suggest demographic trends can account for a non-negligible portion of the global decline in real interest rates. Given available projections, demographic factors should continue to exert downward pressure on real interest rates going forward.
Suggested citation:
Carvalho, Carlos, Andrea Ferrero, Felipe Mazin, and Fernanda Nechio. 2023. “Demographics and Real Interest Rates Across Countries and Over Time.” Federal Reserve Bank of San Francisco Working Paper 2023-32. https://doi.org/10.24148/wp2023-32