The Decline in Fertility Rates and its Effects on Interest Rates and the Value of Land

Real interest rates have fallen substantially in advanced economies since the early 1980's. We show that this trend can be explained by a common pattern in fertility rates. Fertility rates fell in all advanced economies in the 1970's, and this led to an outsized cohort of 'baby boomers'. The life-cycle saving patterns of the baby boomers drive a secular decline in real interest rates, consistent with the data. Our model predicts real rates to reach a trough at around the year 2030, overshooting the long-run balanced growth path level. We also apply our model to the valuation of housing. We find that a standard model of life-cycle demand for housing cannot explain the rise in house prices witnessed in the past few decades