Should-Read: Etienne Gagnon, Benjamin K. Johannsen, and David Lopez-Salido: Understanding the New Normal: The Role of Demographics

Should-Read: Etienne Gagnon, Benjamin K. Johannsen, and David Lopez-Salido: Understanding the New Normal: The Role of Demographics: “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 1–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 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 post-war 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.