The Effects of Demographic Changes on the Real Interest Rate in Japan

February 27, 2012
Daisuke Ikeda^*1
Masashi Saito^*2

Abstract

What are the effects of demographic changes on the real interest rate in Japan? We present a dynamic general equilibrium model in which demographic changes are captured by exogenous changes in the ratio of workers to the total population. Our model predicts that a decline in this ratio in the process of population aging lowers the real interest rate; and the demographic impact on the real interest rate is amplified by a fall in land prices in the presence of collateral constraints. The model is simulated with the realized and forecasted changes in the working-age population ratio and the TFP growth in Japan. Our results indicate that the TFP growth is the main source of variations in the real interest rate, but the demographic factor is also quantitatively important especially for its long-term movements.

JEL Classifications
E20, E43, J11

Keywords
Demographics; land prices; real interest rate; collateral constraint.

We thank Kosuke Aoki, Ippei Fujiwara, Hibiki Ichiue, Ryo Kato, Takeshi Kimura, Kazuo Monma, Ichiro Muto, Takushi Kurozumi, Kiyohiko Nishimura, Nao Sudo, and Tsutomu Watanabe for helpful comments. The views expressed in this paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan.

*1 Monetary Affairs Department
E-mail : daisuke.ikeda@boj.or.jp
*2 Monetary Affairs Department
E-mail : masashi.saitou@boj.or.jp

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