Demographics and the natural real interest Rate: historical and projected paths for the euro area

This paper employs a large-scale overlapping generation model quantifying that demographics account for decrease in the natural real interest rate of about 1.4 percentage points euro area compared with average 1980s to 2030 (roughly at its trough), under baseline calibration. Two channels prevail providing downward impact: increasing scarcity effective labor input and growing willingness individuals save due longer life expectancy. Mitigating factors are: greater substitutability between capital, higher intertemporal elasticity substitution consumption, productivity participation by older and, lesser extent, retirement age. Absent pay-as-you-go pension systems, would stand lower level 0.5 2030. The simulated paths output growth are consistent econometric estimates.