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Working Papers

October 2020, No. 20-14

Estimating the Effects of Demographics on Interest Rates: A Robust Bayesian Perspective

Paul Ho

There are a vast range of estimates for the effect of demographics on interest rates. I show that these magnitudes are not well-identified without data on capital and life-cycle consumption. However, these data are often omitted. Using nonparametric prior sensitivity analysis for an overlapping generations model estimated through Bayesian methods, I show that without these data, small changes in the prior for the discount rate, intertemporal elasticity of substitution, and capital depreciation rate can shift the posterior quantiles for the effects of demographics by up to 1.5 percentage points. Data on the capital-output ratio and life-cycle consumption tighten identification.

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