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  • Chart of the Week
  • January 21, 2020

Reviving the secular stagnation hypothesis

An older worker moves boxes in a warehouse.


Rapidly aging societies may be a problem after all.

A paper in the December issue of the American Economic Review: Insights offers new evidence in support of the secular stagnation hypothesis—an explanation for the recent spell of slow economic growth.

Authors Gauti Eggertsson, Manuel Lancastre, Lawrence Summers revisited research published in the American Economic Review: Papers & Proceedings which suggested that aging populations aren’t responsible for the subpar growth seen in many advanced economies.

The authors found that older populations have, in fact, been a drag on economies, but only after the 2008 Great Recession in countries with ultra-low interest rates.

Figure 1 from their paper shows how the relationship between GDP per capita and the ratio of old to working age adults changes when broken out by the pre- and post-crisis periods. Each point represents a country, and red lines are lines of best fit.



Figure 1 from Eggertsson, et al. (2019)


In Panel A, it appears that older populations have been associated with higher growth rates, though the trend isn’t significant. It’s only in Panel C, the period from 2008 to 2015, that it’s clear older workforces have slowed growth.

The researchers argue that low interest rates after the financial crisis caused the shift. 

Older people tend to work less—which is a drag on the economy—but have more savings. Before 2008, the additional funds were enough to boost the economy through new investments. 

But after 2008, many central banks reduced rates to zero, the lowest they could go, in response to the recession. This lower bound turned the extra retirement savings into a savings glut, and as a result, investors had more capital than they knew what to do with. In this low-rate environment, investments weren’t large enough to offset the negative impact of retiring workers.

The researchers note that other factors that create a gap between the desire to save and invest could contribute to this low-growth story. But with societies continuing to age, interest rates look set to stay near zero. And as their work demonstrates, the economy may behave very differently when rates are at the zero lower bound.