Aging and the real interest rate in Japan: A labor market channel

This paper explores a causal link between aging of the labor force and the declining trend in the real interest rate in Japan. We develop a search and matching model that features heterogeneous workers with respect to their ages and firm-specific skills. Using the model, we examine the long-run implications of the sharp drop in labor force entry in the 1970s. We show that the changes in the demographic structure induce significant low-frequency movements in per capita consumption growth and thus the real interest rate. The model suggests that aging of the labor force caused the real interest rate to decline by 1 percentage point between 1980 and 2010 in Japan.