Demographics and the Natural Rate of Interest in Advanced Economics

Abstract

This final degree project aims to investigate the potential negative impact of current demographic changes on the natural interest rate in the euro area and its effects on pension systems, agent allocation, and policymakers’ effectiveness. To accomplish this, I replicate a macroeconomic Overlapping Generations Model proposed by Bielecki et al. (2020). This model will comprehensively analyse the intersection of population ageing and the natural interest rate in advanced economies, an increasingly relevant topic in contemporary academic research.The project’s main results illustrate the negative correlation between population ageing and natural interest rates and suggest that this process began almost forty years ago. Moreover, the increasing dependency ratios in the future highlight the critical situation of pension systems, even under an optimistic migration scenario. Finally, this study examines the effects of agents’ risk aversion (σ) and substitution elasticity (ε) parameters on the model economy.