Global Aging and Declining World Interest Rates: Macroeconomic Insurance through Pension Reform in Cyprus

42 Pages Posted: 1 Jul 2008

See all articles by Mario Catalán

Mario Catalán

International Monetary Fund (IMF)

Jaime Guajardo

International Monetary Fund (IMF)

Alexander W. Hoffmaister

International Monetary Fund (IMF) - Research Department

Date Written: April 2008

Abstract

How will the world-wide decline in real interest rates associated with global aging affect small open economies (SOEs) with aging populations? Lower interest rates will result in higher capital-labor ratios and increased wages; higher wages, in turn, will be passed on to pension benefits, exacerbating aging-related fiscal pressures. The pass-through effect will be stronger if pensions are indexed to nominal wages rather than prices. Using an overlapping generations model, the paper illustrates the interest rates transmission mechanism and its interaction with pension indexation for the case of Cyprus. In addition, the paper evaluates the capacity of pension reforms to insure the economy against long-run movements in world interest rates. It concludes that pension reforms, particularly those that change the indexation of pensions from wages to prices, provide substantial macro-insurance and shock absorption benefits.

Keywords: Working Paper

Suggested Citation

Catalán, Mario and Guajardo, Jaime and Hoffmaister, Alexander W., Global Aging and Declining World Interest Rates: Macroeconomic Insurance through Pension Reform in Cyprus (April 2008). IMF Working Paper No. 08/98, Available at SSRN: https://ssrn.com/abstract=1153762

Mario Catalán (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Jaime Guajardo

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Alexander W. Hoffmaister

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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