Global natural projections

Michele Catalano and Emilia Pezzolla
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Emilia Pezzolla: Prometeia

Empirica, 2022, vol. 49, issue 4, No 2, 949-990

Abstract: Abstract The paper contributes to the debate on natural interest rates and potential growth rates. We build a model-based projection of the world’s most significant economies/areas to improve understanding of their change over the long run and the factors behind their decline. We use a general equilibrium overlapping generation model to understand the simultaneous role of demographics, technology, and globalization. The novelty of the model lies in the way it constructs a human capital index based on UN population projections and an estimated increasing returns production function for major economies worldwide. We find that the decline in interest rates is well explained through labor market dynamics and the increasing obsolescence of capital goods. We also find that a reduced share of labor income has caused movement in the opposite direction, leading to an increase in natural interest rates, which runs counter to the empirical evidence. Moreover, the dynamics of economic integration predict an endogenous adjustment of global imbalances over the long run, with an increasing weight of the Chinese economy and, consequently, a phase of weakness in United States growth between 2030 and 2040. The model is also used to perform shock scenario analysis. We find that demographic decline can adversely affect the growth dynamics for European countries, while a change in the dynamics of globalization can have serious consequences, especially for the United States, with significant benefits for European countries and China.

Keywords: Forecasting and prediction methods; Simulation methods; Demographic trends; Macroeconomic effects; Forecasts (search for similar items in EconPapers)
JEL-codes: C53 C68 J11 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s10663-022-09550-z

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