Demographics Will Reverse Three Multi-Decade Global Trends

47 Pages Posted: 12 Aug 2017

See all articles by Charles Goodhart

Charles Goodhart

London School of Economics & Political Science (LSE) - Financial Markets Group

Manoj Pradhan

Talking Heads Macro

Date Written: August 2017


Between the 1980s and the 2000s, the largest ever positive labour supply shock occurred, resulting from demographic trends and from the inclusion of China and eastern Europe into the World Trade Organization. This led to a shift in manufacturing to Asia, especially China; a stagnation in real wages; a collapse in the power of private sector trade unions; increasing inequality within countries, but less inequality between countries; deflationary pressures; and falling interest rates. This shock is now reversing. As the world ages, real interest rates will rise, inflation and wage growth will pick up and inequality will fall. What is the biggest challenge to our thesis? The hardest prior trend to reverse will be that of low interest rates, which have resulted in a huge and persistent debt overhang, apart from some deleveraging in advanced economy banks. Future problems may now intensify as the demographic structure worsens, growth slows, and there is little stomach for major inflation. Are we in a trap where the debt overhang enforces continuing low interest rates, and those low interest rates encourage yet more debt finance? There is no silver bullet, but we recommend policy measures to switch from debt to equity finance.

The 15th BIS Annual Conference took place in Lucerne, Switzerland, on 24 June 2016. The event brought together a distinguished group of central bank Governors, leading academics and former public officials to exchange views on the topic "Long-term issues for central banks". The papers presented at the conference and the discussants' comments are released as BIS Working Papers 653 to 656.

BIS Papers No. 92 contains the opening address by Jaime Caruana (General Manager, BIS) and remarks by Kevin Warsh (Hoover Institution and Stanford Graduate School of Business).

Keywords: demography, global labor supply, ageing, real interest rates, inequality

JEL Classification: J11, J18, E43, D63, E31, H63

Suggested Citation

Goodhart, Charles A.E. and Pradhan, Manoj, Demographics Will Reverse Three Multi-Decade Global Trends (August 2017). BIS Working Paper No. 656, Available at SSRN:

Charles A.E. Goodhart (Contact Author)

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom
0207 955 7555 (Phone)
0207 242 1006 (Fax)

Manoj Pradhan

Talking Heads Macro

United Kingdom

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