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Age Milestones and Low Interest Rates, an Analytic Approach

Manuel, Lancastre (2016): Age Milestones and Low Interest Rates, an Analytic Approach.

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Abstract

Major age milestones like the age of first job, retirement age, or life expectancy, bounding relevant economic periods in a persons' life, have been changing substantially during the last decades. In parallel real interest rates have been significantly declining in relevant world economies, reaching stable negative levels in some cases. We propose an analytic approach to relate those two phenomena by using an overlapping multi-generations model to find expressions for real interest rate elasticities to age parameters. The model formalizes the mechanisms supporting the relation between interest rates and age, sheds light on the relative importance of each age milestone in explaining changes of real interest rates, and how other factors like elasticity of inter-temporal substitution, population and productivity growth, inter-generational altruism, as well as a social security system, may mitigate or amplify those changes.

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