2024 BOK International Conference
Session 1 on the 30th: 'Demographic Structure and Real Interest Rates' Presentation
Carlos Carvalhio, Professor at PUC-Rio, Brazil
It has been argued that demographic factors such as low birth rates and aging populations can lead to a decline in real interest rates. An analysis also suggested that in an open economy, the higher the degree of capital market openness, the more sensitive the real interest rate is to global interest rates.
Carlos Carvalho, a professor at PUC-Rio in Brazil, participated as a presenter in Session 1 of the 'BOK International Conference' held on the 30th at the Bank of Korea annex in Jung-gu, Seoul, and presented on the topic "Demographic Structure and Real Interest Rates: A Cross-Country Trend Analysis."
Professor Carvalho stated, "The real interest rates in so-called 'aging countries,' characterized by low labor force growth rates and high dependency ratios, were found to be lower than those in 'young countries,' which have higher labor force growth rates and lower dependency ratios." This result was based on a simulation using data from 19 OECD countries from 1990 to 2019 and projections beyond 2020.
The real interest rates of the 19 OECD countries have shown a downward trend since the 1990s. Until before the global financial crisis, the real interest rates of aging and young countries converged, but afterward, as capital flows contracted and interest rate differentials persisted, the real interest rates in aging countries trended downward.
He analyzed, "The increase in a country's life expectancy has the greatest impact on the decline in real interest rates. Also, countries with active capital flows respond sensitively to global factors in their real interest rates, and convergence among countries is observed." Additionally, factors such as labor force growth rate, total factor productivity, pension amounts relative to GDP, government debt, government expenditure, and rising retirement age were all evaluated as factors that increase real interest rates.
Empirical analysis also showed that, consistent with the simulation results, declines in labor force growth rates and increases in life expectancy were factors contributing to the decline in real interest rates. Furthermore, global interest rates were analyzed as a dominant determinant. Increases in government debt and pension expenditures were found to be factors that raise real interest rates. However, the impact of the Gini coefficient, an inequality indicator, on real interest rates was not clear.
Professor Carvalho evaluated, "The long-term trend of real interest rates is largely influenced domestically by demographic factors such as changes in life expectancy and labor force, and externally by the degree of globalization of capital markets, which affects the influence of global interest rate determinants."
This study expanded on previous research based on closed models by analyzing the relationship between demographic structure and real interest rates in an open economy context. The research classified countries into global, young, and aging categories to understand the effects of demographic structure and external openness on real interest rates.
Professor Park Woong-yong of Seoul National University's Department of Economics, who participated as a discussant, commented on the presentation, stating, "South Korea's fertility rate in 2023 is 0.72. It is already too late or impossible to reverse demographic changes, so now is the time to prepare for a transition."
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