Using a dynamic macroeconomic model, the paper studies to what extent the ongoing demographic change in the euro area (the population aging process determined by decreasing fertility and mortality rates) can have an impact on the natural real interest rate, namely the real return on capital that theoretically brings economic output in line with its potential.
Compared with the average for the 1980s, demographics account for a decrease in the natural real interest rate of about 1.4 percentage points until 2030 (roughly at its trough) and about 1 percentage point until the subsequent stationary equilibrium. This can be attributed to the greater scarcity of labor input, brought about by a lower fertility, and by a higher willingness to save by individuals due to a longer life expectancy.
Published in 2021 in: Journal of Economic Dynamics and Control, v. 132, Article 104209
