Asset Returns and Economic Growth
AbstractAmerica is probably facing a slowdown in the rate of natural population increase and possibly a slowdown in productivity growth. We argue that, if these two factors depress the rate of future economic growth, one cannot assume that the past performance of asset returns is indicative of future results. Simple standard closed-economy growth models predict that a growth slowdown will likely lower the marginal product of capital and thus the long-run rate of return. Moreover, if current asset valuations represent rational expectations, simple arithmetic shows that it is almost impossible for past rates of return to continue through a growth slowdown. In standard models at least, only a large shift in the income distribution toward capital, or future current account surpluses that are larger and more persistent than those that nineteenth-century Britain sustained for generations, give promise for reconciling a future slowdown with a continuation of historical asset returns.
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Bibliographic InfoArticle provided by Economic Studies Program, The Brookings Institution in its journal Brookings Papers on Economic Activity.
Volume (Year): 36 (2005)
Issue (Month): 1 ()
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macroeconomics; Asset Returns; Economic Growth;
Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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- Bezemer, Dirk J., 2010. "Understanding financial crisis through accounting models," Accounting, Organizations and Society, Elsevier, vol. 35(7), pages 676-688, October.
- Andrew Sharpe, 2006. "Future Productivity Growth in Canada and Implications for the Canada Pension Plan," CSLS Research Reports, Centre for the Study of Living Standards 2006-01, Centre for the Study of Living Standards.
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