The effects of a slowdown in total factor productivity growth and ageing on GDP growth, inflation and interest rates

Romanos Priftis

Quarterly Report on the Euro Area (QREA), 2016, vol. 15, issue 1, 19-24

Abstract: Demographic ageing and the slowdown of productivity growth are considered as two concerns for medium-term growth prospects affecting the euro area prior to the financial crisis, that have gathered further momentum since 2008. This section presents a model-based assessment of the effects of changes in total factor productivity (TFP) and the dependency ratio on the euro area economy. In particular it assesses their short- and medium-term impact on growth, inflation and interest rates. Interestingly, these underlying alleged causes of secular stagnation, which accelerated in 2008, produce distinct macroeconomic effects, particularly when assessed over different time horizons. Both shocks generate demand- and supply-side effects leading to a substantial decline in GDP growth, a sizeable fall in inflation, and a drop in interest rates. Following a temporary decline in TFP, the short-term fall in GDP growth is stronger than in the case of an ageing shock, but GDP, inflation and interest rates return to baseline in the medium-term. The shock to the dependency ratio causes the GDP deflator and the nominal interest rate to decline by more than the shock to TFP in the short run due to increases in savings and a fall in consumption. Its GDP effect, while much smaller in the short-term is also much more protracted and still visible in the medium term. The ageing shock also produces an increase in inflation in the medium-term following the projected reduction in labour supply. In the current economic juncture, an expected decline in productivity and a deterioration of demographic trends could leave Europe particularly vulnerable to stagnation following adverse shocks in the region.

Keywords: total factor productivity; aging (search for similar items in EconPapers)
Date: 2016
References: Add references at CitEc
Citations:

Downloads: (external link)
https://economy-finance.ec.europa.eu/system/files/2017-02/ip024_en_2.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:euf:qreuro:0151-02

Access Statistics for this article

More articles in Quarterly Report on the Euro Area (QREA) from Directorate General Economic and Financial Affairs (DG ECFIN), European Commission Contact information at EDIRC.
Bibliographic data for series maintained by ECFIN INFO ().