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Understanding the New Normal: The Role of Demographics

Author

Listed:
  • Etienne Gagnon

    (Federal Reserve Board)

  • Benjamin K. Johannsen

    (Federal Reserve Board)

  • David López-Salido

    (Federal Reserve Board
    CEPR)

Abstract

We calibrate an overlapping-generations 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 indicates that demographic factors associated with the post-war baby boom pushed up real interest rates and real gross domestic product (GDP) growth from 1960 to the 1980s. Since the 1980s, the model accounts for a little more than a 1-percentage-point decline in both real GDP growth and real interest rates—much of the permanent declines in those variables according to some estimates. Our model predicts GDP growth and interest rates will remain low by historical standards, consistent with a “new normal” for the U.S. economy.

Suggested Citation

  • Etienne Gagnon & Benjamin K. Johannsen & David López-Salido, 2021. "Understanding the New Normal: The Role of Demographics," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 69(2), pages 357-390, June.
  • Handle: RePEc:pal:imfecr:v:69:y:2021:i:2:d:10.1057_s41308-021-00138-4
    DOI: 10.1057/s41308-021-00138-4
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    More about this item

    Keywords

    E17; E21; J11;
    All these keywords.

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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