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Global Demographic Trends will Significantly Impact Monetary Policy in Coming Years, Says Dallas Fed Economic Letter

For immediate release: July 13, 2016

Slower population and labor force growth is likely to depress real interest rates

A slowdown in population and labor force growth among the world’s advanced economies will have significant implications for global monetary policy over the next decade, according to the Federal Reserve Bank of Dallas’ latest Economic Letter.

In “Global Demographic Trends Shape Policy Environment”, Dallas Fed economist Mark A. Wynne examines the shift in population growth from advanced economies such as those in Europe, North America and Japan to developing economies—particularly in Asia and Africa.

“The total population in three regions of the world—Eastern Europe, Japan and Western Europe—has already or will shortly pass the tipping point from growth to decline,” he writes.

Perhaps more important from the standpoint of economic policy are shifts taking place in the working-age population. Since 2012, the number of potential workers has fallen as a share of the global population and is likely to continue to do so, according to Wynne. In fact, with the exception of Africa, every major geographic area of the world is projected to see a declining working-age population relative to the total.

At the same time, the dependency ratio—people age 15 and under plus those 64 and older—is expected to rise.

“Each worker will need to support a larger number of dependents going forward, putting potentially significant strains on the public finances of many countries,” he writes.

In general, “faster growth in the working-age population is associated with higher real interest rates, while slower growth is associated with lower real rates,” Wynne writes, though he cautions that the relationship is not as strong as economic theory might predict.

He also notes that demographics are not the only factor that plays into economic policy and that public policy can, in turn, affect demographic trends. Nevertheless, “demographics will likely be a significant source of downward pressure on global interest rates for some time to come,” he writes.

Wynne is a vice president and associate director of research for international economics in the Research Department and director of the Globalization and Monetary Policy Institute at the Dallas Fed.

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Media contact:
Jennifer Chamberlain
Federal Reserve Bank of Dallas
Phone: 214-922-6748
Email: Jennifer.Chamberlain@dal.frb.org