Department of Economics
Room 3014 Arts Building
Institutional Affiliation: Trinity College, Dublin
NBER Working Papers and Publications
|April 2020||The Murder-Suicide of the Rentier: Population Aging and the Risk Premium|
with : w26943
Population aging has been linked to global declines in real interest rates. A similar trend is seen for equity risk premia, which are on the rise. An existing literature can explain part of the declining trend in safe rates using demographics, but has no mechanism to speak to trends in relative returns on different assets. We calibrate a heterogeneous agent life-cycle model with equity markets and aggregate risk, and we show that aging demographics can simultaneously account for both the majority of a downward trend in the risk free rate, while also increasing the return premium attached to risky assets. This is because the life-cycle savings dynamics that have been well documented exert less pressure on risky assets as older households shift away from risk. Under reasonable calibrations w...