Understanding the New Normal: The Role of Demographics

74 Pages Posted: 17 Oct 2016

See all articles by Etienne Gagnon

Etienne Gagnon

Board of Governors of the Federal Reserve System

Benjamin Kramer Johannsen

Board of Governors of the Federal Reserve System

David Lopez-Salido

Board of Governors of the Federal Reserve System

Date Written: 2016-09-28

Abstract

Since the onset of the Great Recession, the U.S. economy has experienced low real GDP growth and low real interest rates, including for long maturities. We show that these developments were largely predictable by calibrating an overlapping-generation model with a rich demographic structure to observed and projected changes in U.S. population, family composition, life expectancy, and labor market activity. The model accounts for a 1¼–percentage point decline in both real GDP growth and the equilibrium real interest rate since 1980 — essentially all of the permanent declines in those variables according to some recent estimates. The model also implies that these declines were especially pronounced over the past decade or so because of demographic factors most-directly associated with the baby boom and the passing of the information technology boom. Our results further suggest that real GDP growth and real interest rates will remain low in coming decades, consistent with the U.S economy having reached a “new normal.”

Keywords: Demographics, Equilibrium real interest rate, GDP growth, New normal

JEL Classification: E17, E21, J11

Suggested Citation

Gagnon, Etienne and Johannsen, Benjamin Kramer and Lopez-Salido, David, Understanding the New Normal: The Role of Demographics (2016-09-28). FEDS Working Paper No. 2016-080. Available at SSRN: https://ssrn.com/abstract=2846343 or http://dx.doi.org/10.17016/FEDS.2016.080

Etienne Gagnon (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
2024523522 (Phone)

Benjamin Kramer Johannsen

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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