Medium-Run Implications of Changing Demographic Structures for the Macro-Economy

Abstract

While there may be an important, but transitory, cyclical component in the poor performance of the past decade, we will emphasise the secular forces: the impact of demographic structure and innovation. We draw on the empirical and theoretical work reported in Aksoy, Basso, Smith and Grasl (2015), ABSG, about the impact of changes in demographic structure on macroeconomic outcomes. This suggests that changes in age profile not only have significant implications for savings, investment, real interest rates and growth but also for innovation. The size of the effects seems plausible. For instance, if in 2015 the UK had the 1970 age structure, it would have added 0.68 percentage points to the long-run annual growth rate. The model suggests that the population ageing predicted for the next decades will tend to reduce output growth and real interest rates across OECD countries.

Keywords

population age profile medium-term output growth innovation lifecycle Kuznets cycles

Get full access to this article

View all access options for this article.

References

Acemoglu

and Restrepo

(2017), ‘Secular stagnation? The effect of aging on economic growth in the age of automation’, NBER Working Paper 23077.

Aksoy

, Basso

H.S.

, Smith

R.P.

and Grasl

(2015), ‘Demographic structure and macroeconomic trends’, Working Paper 1528, Banco de Espana.

Comin

and Gertler

(2006), ‘Medium term business cycles’, American Economic Review, 96(3), pp. 523–51.

Favero

, Gozluklu

A.E.

and Yang

(2016), ‘Demographics and the behavior of interest rates’, IMF Economic Review, Palgrave Macmillan, International Monetary Fund, 64(4), November, pp. 732–76.

Feldstein

(2017), ‘Underestimating the real growth of GDP, personal income and productivity’, Journal of Economic Perspectives, 31(2), pp. 145–64.

Goodhart

, Pradhan

and Pardeshi

(2015), ‘Could demographics reverse three multi-decade trends?’, Global Issues, Morgan Stanley & Co. International Plc., London.

Gordon

R.J.

(2014), ‘The demise of US economic growth restatement, rebuttals and reflections’, Working Paper 19895, National Bureau of Economic Research.

Hamilton

J.D.

(2017), ‘Why you should never use the Hodrick Prescott filter’, Working Paper University of San Diego.

Hansen

(1939), ‘Economic progress and declining population growth’, American Economic Review, 29(1), pp. 1–15.

10.

Irmen

and Litina

(2016), ‘Population aging and inventive activity’, CE-Sifo Working Paper 584.

11.

Jones

B.F.

(2010), ‘Age and great invention’, The Review of Economic Statistics, 92(1), pp. 1–14.

12.

Kuznets

(1960), ‘Population change and aggregate output’, in Demographic and Economic Change in Developed Countries, National Bureau of Economic Research, pp. 324–51.

13.

Nordhaus

W.D.

(2015), ‘Are we approaching an economic singularity? Information technology and the future of economic growth’, Cowles Foundation Discussion Paper 2021.

14.

Reinhart

C.M.

and Rogoff

K.S.

(2009), This Time is Different: Eight Centuries of Financial Folly, Princeton: Princeton University Press.

15.

Summers

L.H.

(2015), ‘Have we entered an age of secular stagnation? IMF Fourteenth Annual Research Conference in Honor of Stanley Fischer', Washington, DC’, IMF Economic Review, Palgrave Macmillan, International Monetary Fund, 63 (1), May, pp. 277–80.