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Demographics will reverse three multi-decade global trends

Author

Listed:
  • Goodhart, Charles
  • Pradhan, Manoj

Abstract

Between the 1980s and the 2000s, the largest ever positive labour supply shock occurred, resulting from demographic trends and from the inclusion of China and eastern Europe into the World Trade Organization. This led to a shift in manufacturing to Asia, especially China; a stagnation in real wages; a collapse in the power of private sector trade unions; increasing inequality within countries, but less inequality between countries; deflationary pressures; and falling interest rates. This shock is now reversing. As the world ages, real interest rates will rise, inflation and wage growth will pick up and inequality will fall. What is the biggest challenge to our thesis? The hardest prior trend to reverse will be that of low interest rates, which have resulted in a huge and persistent debt overhang, apart from some deleveraging in advanced economy banks. Future problems may now intensify as the demographic structure worsens, growth slows, and there is little stomach for major inflation. Are we in a trap where the debt overhang enforces continuing low interest rates, and those low interest rates encourage yet more debt finance? There is no silver bullet, but we recommend policy measures to switch from debt to equity finance.

Suggested Citation

  • Goodhart, Charles & Pradhan, Manoj, 2017. "Demographics will reverse three multi-decade global trends," LSE Research Online Documents on Economics 84208, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:84208
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    File URL: http://eprints.lse.ac.uk/84208/
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    Cited by:

    1. Mr. Adrian Peralta & Agustin Roitman, 2018. "Technology and the Future of Work," IMF Working Papers 2018/207, International Monetary Fund.
    2. Perotti, Enrico & Döttling, Robin, 2017. "Secular Trends and Technological Progress," CEPR Discussion Papers 12519, C.E.P.R. Discussion Papers.
    3. repec:zbw:bofrdp:2017_036 is not listed on IDEAS
    4. Kapeliushnikov, Rostislav I. (Капелюшников, Ростислав И.), 2019. "The Phenomenon of Population Aging: Major Economic Effects [Феномен Старения Населения: Экономические Эффекты]," Ekonomicheskaya Politika / Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 3, pages 8-53, June.
    5. Papetti, Andrea, 2021. "Demographics and the natural real interest Rate: historical and projected paths for the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 132(C).
    6. Papapetrou, Evangelia & Tsalaporta, Pinelopi, 2020. "The impact of population aging in rich countries: What’s the future?," Journal of Policy Modeling, Elsevier, vol. 42(1), pages 77-95.
    7. György Matolcsy & Márton Nagy & Dániel Palotai & Barnabás Virág, 2020. "Inflation in the Digital Age: Inflation Measurement and Bias in the 21st Century," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 19(1), pages 5-36.
    8. Jean-Francois Mercier, 2023. "Quo vadis rstar," Occasional Bulletin of Economic Notes 11046, South African Reserve Bank.
    9. Claudio Borio & Piti Disyatat & Mikael Juselius & Phurichai Rungcharoenkitkul, 2022. "Why So Low for So Long? A Long-Term View of Real Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 18(3), pages 47-87, September.
    10. Noëmie Lisack & Rana Sajedi & Gregory Thwaites, 2021. "Population Aging and the Macroeconomy," International Journal of Central Banking, International Journal of Central Banking, vol. 17(2), pages 43-80, June.
    11. Dennis Bonam & Gabriele Galati & Irma Hindrayanto & Marco Hoeberichts & Anna Samarina & Irina Stanga, 2019. "Inflation in the euro area since the Global Financial Crisis," DNB Occasional Studies 1703, Netherlands Central Bank, Research Department.
    12. Claudio Borio & Piti Disyatat & Mikael Juselius & Phurichai Rungcharoenkitkul, 2017. "Why so low for so long? A long-term view of real interest rates," BIS Working Papers 685, Bank for International Settlements.
    13. Julia Włodarczyk & Indranarain Ramlall & Jan Acedański, 2020. "Macroeconomic Effects of an Ageing Population in Mauritius," South African Journal of Economics, Economic Society of South Africa, vol. 88(4), pages 551-574, December.
    14. B. De Backer & J. Wauters, 2017. "The cyclical and structural determinants of the low interest rate environment," Economic Review, National Bank of Belgium, issue ii, pages 69-86, september.
    15. repec:rbz:oboens:11027 is not listed on IDEAS
    16. Apel, Mikael & Armelius, Hanna & Claussen, Carl Andreas, 2017. "The level of the inflation target – a review of the issues," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, issue 2, pages 36-56.
    17. Wang, Lei & Zhu, Taihui, 2021. "Population aging and money demand," Economics Letters, Elsevier, vol. 206(C).
    18. Bańbura, Marta & Albani, Maria & Ambrocio, Gene & Bursian, Dirk & Buss, Ginters & de Winter, Jasper & Gavura, Miroslav & Giordano, Claire & Júlio, Paulo & Le Roux, Julien & Lozej, Matija & Malthe-Thag, 2018. "Business investment in EU countries," Occasional Paper Series 215, European Central Bank.

    More about this item

    Keywords

    demography; global labor supply; ageing; real interest rates; inequality;
    All these keywords.

    JEL classification:

    • N0 - Economic History - - General

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