Are Demographics Responsible for the Declining Interest Rates? Evidence From U.S. Metropolitan Areas

Interest rates have declined dramatically over the past 30 years. At the same time the birth rate has declined, and life expectancy has increased. Demographic changes leading to an older population have been proposed as an explanation for the decline in rates. However, this conjecture is difficult to test because demographics change slowly over time, and are correlated with other country characteristics. We show that in a cross-section of U.S. MSAs, the relationship between interest rates and demographics is only partially consistent with the above conjecture, and with existing models, which predict a negative association between age and interest rates. This association is, indeed, negative for lending rates, but positive for deposit rates. We rationalize this pattern by extending an OLG model where the banking sector is not perfectly competitive.

Keywords: Demographics, Deposit Rates, Lending Rates, Bank Competition

JEL Classification: E43, G21, J11

Suggested Citation: Suggested Citation

Favilukis, Jack Y and Sheng, Jinfei and Zhang, Terry, Are Demographics Responsible for the Declining Interest Rates? Evidence From U.S. Metropolitan Areas (January 7, 2021). 2021 AFA Annual Meeting, Available at SSRN: https://ssrn.com/abstract=2892775 or http://dx.doi.org/10.2139/ssrn.2892775