Beschreibung:
The phenomenon of “falling stars” in the U.S., declining trends in nominal yields since the 1980s accompanied by falling trends in inflation and real interest rates, calls for a coherent explanation of the long-term driving forces. Using a parsimonious non-parametric method and data on the demographic age distribution, we estimate the functional demographic (FD) trends as aggregated generational impacts. The FD trends fit the low-frequency movements in interest rates remarkably well. Decomposition analysis shows that baby boomers’ life-cycle impact dominates the trends in interest rates. The FD trends of inflation and real rates are consistent with the “falling stars” pattern