The role of demographic factors in interest rate forecasting

Slowly moving fundamental time series can be mistaken for time trends. Use of this series can increase credibility of medium-term and long-term forecasts. This paper introduces a new slowly moving fundamental time series—the age distribution of the US population—to explain trends in real US interest rates over the past 35 years. We argue that lifecycle consumption patterns at the individual level can influence aggregate saving and real interest rates. Empirical evidence is presented that supports the relationship between age distribution and expected real interest rates. Simulations of future interest rates are developed.