ON THE POSSIBILITY AND DRIVING FORCES OF SECULAR STAGNATION - A GENERAL EQUILIBRIUM ANALYSIS APPLIED TO BELGIUM -

Freddy Heylen, Pieter Van Rymenant, Brecht Boone and Tim Buyse

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: This paper investigates the possibility of today’s OECD economies entering into a very long period of poor per capita economic growth and very low real interest rates. We construct a general equilibrium model with overlapping generations of heterogeneous individuals, differing in ability and human capital, and with genetic and financial transfers from parents to children. Our model allows to study within one coherent framework the effects of those factors that are most often mentioned in the literature as possible drivers of secular stagnation: demographic change, a slowdown in the rate of technical progress, rising inequality, borrowing constraints, and downward rigidity in the real interest rate. We calibrate our model to Belgium and find that its predictions match key facts in Belgium in 1950-2009 very well. We then simulate projected future changes in technical progress and demography. In alternative scenarios we additionally impose rising inequality, borrowing constraints and/or a lower bound to the real interest rate. When we assume unchanged public policies and a modest future rate of technical progress, our conclusions about future per capita output and growth are rather pessimistic. Demographic change is by far the most influential cause of low growth. If a lower bound to the real interest rate is binding, it could considerably aggravate the problem of stagnation.

Keywords: secular stagnation; overlapping generations; economic growth; ageing; demography; inequality (search for similar items in EconPapers)
JEL-codes: C68 D91 E17 J11 O40 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2016-08
New Economics Papers: this item is included in nep-cmp, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:16/919

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