Aging, Secular Stagnation and the Business Cycle

IMF Working Papers, March 23, 2018

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Aging, Secular Stagnation and the Business Cycle

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Bibliographic details

• Authors: Callum Jones
• Published: March 23, 2018
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484345405.001

Summary of research question and approach

• Research question: Why was U.S. log output per capita 12 percent below its pre-2008 linear trend as of 2015?
• Model and estimation approach:
  • A model of the US that includes demographics, real and monetary shocks, and the occasionally binding ZLB on nominal rates.
  • The model captures slow-moving demographic-driven trends and episodes when the ZLB binds.

Key findings

• Output and trend gap:
  • As of 2015, U.S. log output per capita was 12 percent below what its pre-2008 linear trend would predict.
  • Demographics alone can explain one-third of the gap between log output per capita and its linear trend in 2015.
• Interest rates and the ZLB:
  • Demographic changes generated slow-moving trends in the real interest rate, employment, and productivity.
  • Demographics lowered real rates and caused the ZLB to bind between 2009 and 2015.
  • The ZLB episode contributed to the slow recovery after the Great Recession.

Mechanisms and channels identified

• Demographic channel:
  • Aging and demographic change produce slow-moving shifts in labor supply, productivity profiles, and demand that affect real interest rates and output.
• Interaction with monetary policy:
  • Lower real rates increased the likelihood and duration of the ZLB regime.
  • An occasionally binding ZLB amplifies and prolongs downturns in the presence of demographic-driven lower natural rates.
• Macroeconomic aggregates affected:
  • Real interest rate, employment, and productivity exhibit long-run trends driven by demographics in the model.

Policy-relevant implications

• Monetary policy limitations:
  • Structural demographic trends can reduce the natural real interest rate and constrain conventional monetary policy through more frequent or prolonged ZLB episodes.
• Importance of accounting for demographics:
  • Understanding the contribution of demographic change is essential for diagnosing secular stagnation and for designing appropriate policy responses when the ZLB binds.

Publication metadata (selected)

• Pages: 45
• Volume: 2018
• Issue: 067
• Series: Working Paper No. 2018/067
• DOI: https://doi.org/10.5089/9781484345405.001

Source: "Aging, Secular Stagnation and the Business Cycle", Callum Jones, IMF Working Papers, March 23, 2018.

Content in this bundle

• Aging, Secular Stagnation and the Business Cycle, WP/18/67, March 2018
  • Aging, Secular Stagnation and the Business Cycle, WP/18/67, March 2018 (Markdown version)
  • Aging, Secular Stagnation and the Business Cycle, WP/18/67, March 2018 (PDF)