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Understanding the New Normal : The Role of Demographics

Author

Listed:
  • Etienne Gagnon
  • Benjamin K. Johannsen
  • J. David Lopez-Salido

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.”

Suggested Citation

  • Etienne Gagnon & Benjamin K. Johannsen & J. David Lopez-Salido, 2016. "Understanding the New Normal : The Role of Demographics," Finance and Economics Discussion Series 2016-080, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2016-80
    DOI: 10.17016/FEDS.2016.080
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    File URL: http://www.federalreserve.gov/econresdata/feds/2016/files/2016080pap.pdf
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    References listed on IDEAS

    as
    1. Martin Browning & Mette Ejrnæs, 2009. "Consumption and Children," The Review of Economics and Statistics, MIT Press, vol. 91(1), pages 93-111, February.
    2. Benjamin K. Johannsen & Elmar Mertens, 2016. "The Expected Real Interest Rate in the Long Run : Time Series Evidence with the Effective Lower Bound," FEDS Notes 2016-02-09, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The New Normal
      by thebusinesscycleblog in The business cycle blog on 2016-10-15 20:07:31

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    1. repec:fip:fedfel:00164 is not listed on IDEAS
    2. repec:bin:bpeajo:v:48:y:2017:i:2017-01:p:235-316 is not listed on IDEAS
    3. Marco Del Negro & Domenico Giannone & Marc P. Giannoni & Andrea Tambalotti, 2017. "Safety, Liquidity, and the Natural Rate of Interest," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 235-316.
    4. Michael T. Kiley & John M. Roberts, 2017. "Monetary Policy in a Low Interest Rate World," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 317-396.
    5. Williams, John C., 2018. "The Future Fortunes of R-star: Are They Really Rising?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.
    6. repec:eee:moneco:v:93:y:2018:i:c:p:45-62 is not listed on IDEAS
    7. Cooley, Thomas & Henriksen, Espen, 2018. "The demographic deficit," Journal of Monetary Economics, Elsevier, vol. 93(C), pages 45-62.
    8. Claudio Borio & Piti Disyatat & Mikael Juselius & Phurichai Rungcharoenkitkul, 2018. "Monetary policy in the grip of a pincer movement," BIS Working Papers 706, Bank for International Settlements.
    9. repec:eee:moneco:v:93:y:2018:i:c:p:63-67 is not listed on IDEAS

    More about this item

    Keywords

    Demographics ; Equilibrium real interest rate ; GDP growth ; New normal;

    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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