Abstract:
Population growth rates have fallen considerably in most developed countries. An important question for monetary policy is whether this has led to a fall in the natural rate of interest. In representative agent models, the response of the natural rate to a fertility shock crucially depends on the preference parameter determining how households weight generations of different size. Estimating a medium-scale model of the US-economy featuring fertility shocks, I find that declining population growth has lowered both the natural rate and inflation by about 0.4 percentage points in recent decades.