Secular Stagnation? Growth, Asset Returns and Welfare in the Next Decades

Project Start:01/2016
Researchers:Raphael Abiry, Christian Geppert, Dirk Krueger, Philipp Krüger, Alexander Ludwig
Category: Macro Finance
Funded by:LOEWE

A first part of this project aims at completing an ongoing research project on the asset pricing implications of demographic change. Demographic change leads to the relative scarcity of raw labor and relative abundance of physical capital. Standard analyses suggest that this depresses asset returns and has adverse welfare consequences for households who retire when asset returns are low. In this paper, we investigate quantitatively the aforementioned effects in the US economy. To this end, we develop a large scale overlapping generations’ model with two assets and risky human capital. We ask by how much human capital adjustments, which increase the quality of labor, reduce the downward pressure on asset returns and mitigate the adverse welfare consequences. First results documented in SAFE Working Paper 145 show that the expected rate of return to risky equity decreases by roughly 0.16 percentage points until 2030 while the equity premium increases by about 0.08 pp. Endogenous human capital adjustments are crucial for these small effects. A key problem of the model variant on which these results are based is the design of the model, which does, by construction, not allow us to model a PAYG financed pension system consistently. Also, numerical instabilities emerged. We have now specified and implemented an alternative specification. We are currently in the process of calibrating the structural model parameters of this new specification.

In a second part, we plan to extend the framework by an explicit notion of government debt positions. This extension will enable us to price government debt in a coherent framework (a production economy with multiple assets) and to predict how risky government debt is going to evolve in the future. Applications will consider extensions also to the European Union. Within this framework it will then also be possible to make statements about the stabilizing role of Euro bonds.

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
145Raphael Abiry, Christian Geppert, Alexander LudwigSecular Stagnation? Growth, Asset Returns and Welfare in the Next Decades: First Results2016 Macro Finance secular stagnation; demographic change; overlapping generations; natural rate; equity premium; growth; welfare; human capital

Related Policy Publications

Alexander LudwigDemographischer Wandel: Kapitalrenditen, Löhne und Verteilungswirkungen
White Paper No. 38