Impact of Ageing on Equilibrium Interest Rate in Pakistan: An Empirical Analysis

Abstract

This study empirically investigates the impact of ageing on equilibrium interest rate in Pakistan for the period 1982-2014. The study has used young age working population (YAWP) and proportion of middle age working population (MAWP) as indicators of ageing to determine the importance of age demographics on equilibrium interest rate. Based on unit root tests, the study has estimated Autoregressive Distributive Lag (ARDL) model. The findings of the study show that YAWP and MAWP have positive and negative impact on interest rate in Pakistan, respectively. The results are supported by standard diagnostic tests and signs of estimated coefficients are according to the expectations. Further, long run and short run estimation results are consistent with recent empirical evidence found for other countries. In case of Pakistan, no empirical study previously exists on the subject thus highlighting the contribution of this study in the literature. Based on findings of the study, it is obvious that age structure of working population along with traditional macroeconomic determinants of equilibrium interest rate must be considered for designing effective policies to bring equilibrium in interest rate in Pakistan.