Demography and Growth: A Unified Treatment of Overlapping Generations

Neil Bruce and Stephen J Turnovsky ()

No UWEC-2009-13, Working Papers from University of Washington, Department of Economics

Abstract: We construct a unified overlapping-generations (OLG) framework of equilibrium growth, which includes the Blanchard ‘perpetual youth” and the Samuelson models as special, polar cases. We derive expressions determining the equilibrium growth rate in labor productivity using a Romer-style production sector for a model with quite general assumptions about mortality, retirement, and other demographic conditions. We numerically determine the equilibrium growth rates for the Blanchard and Samuelson models, and for OLG models intermediate between them, using comparable assumptions to examine how alternative forms of the OLG model can affect the equilibrium growth and savings rates. Models with “realistic” demographic specifications are found to be better approximated by the Samuelson polar case than the Blanchard polar case. We also compare growth rates in OLG models to those of the standard Romer model, which has no significant demographic structure. We examine how the equilibrium growth rate is affected by changes in demographic factors in the different OLG models, including changes in the population growth rate, the ratio of working years to retirement years over the life cycle, and longevity. Growth rates are lower in economies where households work a larger fraction of their lifetimes and where population growth rates are high. In particular, economies with high population growth, short longevity, and limited retirement opportunities occupy a “demographic trap” of low or negative productivity growth rates. Increases in longevity, ceteris paribus, increase the growth rate up to a point, beyond which further increases cause the growth rate to decline.

Date: 2009-04

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