Secular Stagnation? Growth, Asset Returns and Welfare in the Next Decades: First Results

SAFE Working Paper No. 145

41 Pages Posted: 28 Sep 2016

See all articles by Christian Geppert

Christian Geppert

Organization for Economic Co-Operation and Development (OECD) - Directorate for Employment, Labour and Social Affairs (ELS)

Alexander Ludwig

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA); Goethe University Frankfurt

Raphael Abiry

ZEW – Leibniz Centre for European Economic Research

Date Written: September 8, 2016

Abstract

Ongoing demographic change will lead to a relative scarcity of raw labor to the effect that output growth will be decreasing in the next decades, a secular stagnation. As physical capital will be relatively abundant, this decrease of output will be accompanied by reductions of asset returns. We quantify these effects for the US economy by developing an overlapping generations model with risky and risk-free assets. Without adjustments of human capital, risky returns decrease until 2035 by about 0.7 percentage point, and the risk-free rate by about one percentage point, leading to substantial welfare losses for asset rich households. Per capita output is reduced by 6%. Endogenous human capital adjustments strongly mitigate these effects. We conclude that human capital policies will be crucial in the context of labor shortages.

Keywords: secular stagnation, demographic change, overlapping generations, natural rate, equity premium, growth, welfare, human capital

JEL Classification: E17, C68, G12

Suggested Citation

Geppert, Christian and Ludwig, Alexander and Abiry, Raphael, Secular Stagnation? Growth, Asset Returns and Welfare in the Next Decades: First Results (September 8, 2016). SAFE Working Paper No. 145, Available at SSRN: https://ssrn.com/abstract=2841555 or http://dx.doi.org/10.2139/ssrn.2841555

Christian Geppert

Organization for Economic Co-Operation and Development (OECD) - Directorate for Employment, Labour and Social Affairs (ELS) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

Alexander Ludwig (Contact Author)

Max Planck Society for the Advancement of the Sciences - Munich Center for the Economics of Aging (MEA) ( email )

Amalienstrasse 33
Munich, 80799
Germany

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Raphael Abiry

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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