Author: Jae Won Lee(Bank of Korea), Woong Yong Park(Seoul National Univ.), Seolwoong Hwang(Bank of Korea)

This study investigates the impact of demographic changes on real interest rate dynamics in Korea. We develop an open-economy life-cycle model that incorporates Korea’s high degree of external openness to analyze historical trends and produce long-term projections of the real interest rate. The model successfully explains Korea’s higher real interest rates relative to advanced economies since the 1990s, as well as the downward trend observed over time. Our findings highlight two key demographic forces—rising life expectancy and declining fertility—as major contributors to this decline, albeit with different magnitudes and duration of impact. These results underscore the importance of demographic trends in shaping long-term interest rate trajectories and provide implications for macroeconomic policy and fiscal planning.