Demographics and Secular Stagnation Hypothesis in Europe

Transcription

1 Demographics and Secular Stagnation Hypothesis in Europe Carlo Favero (Bocconi University, IGIER) Vincenzo Galasso (Bocconi University, IGIER, CEPR & CESIfo) Growth in Europe?, Marseille, September 2015

2 The Secular Stagnation Hypothesis Secular Stagnation was first used by Alvin Hansen in his 1938 Presidential Address Economic Progress and Declining Population Growth Recently L.Summers argued that negative real interest rates are needed to equate saving and investment with full employment in Europe But, with low inflation and zero lower bound on policy interest rates, it may be impossible for an economy to achieve full employment, satisfactory growth and financial stability (as low real rates increase the probability of bubbles) What s Demography got to do with it?

3 The Secular Stagnation Hypothesis Secular Stagnation was first used by Alvin Hansen in his 1938 Presidential Address Economic Progress and Declining Population Growth Recently L.Summers argued that negative real interest rates are needed to equate saving and investment with full employment in Europe But, with low inflation and zero lower bound on policy interest rates, it may be impossible for an economy to achieve full employment, satisfactory growth and financial stability (as low real rates increase the probability of bubbles) What s Demography got to do with it?

4 The Secular Stagnation Hypothesis Secular Stagnation was first used by Alvin Hansen in his 1938 Presidential Address Economic Progress and Declining Population Growth Recently L.Summers argued that negative real interest rates are needed to equate saving and investment with full employment in Europe But, with low inflation and zero lower bound on policy interest rates, it may be impossible for an economy to achieve full employment, satisfactory growth and financial stability (as low real rates increase the probability of bubbles) What s Demography got to do with it?

5 The Secular Stagnation Hypothesis and Demography What s Demography got to do with it? Demographers insist on the importance of the age structure of the population for growth and real rates, as demographics determine the supply of saving. An increase in life expectancy with lower fertility increases the supply of savings by the middle-aged, but aging and a higher share of old age population might more than compensate this effect. The effect of demographics on the supply of saving is to be determined empirically

6 Policy Choices and Demographics What is the best strategy to promote growth in the current situation: Structural reforms and/or Macroeconomic adjustment? Competing Economic Views: Reform Fundamentalists vs. Macro Adjustment Believers Role of Demographics and its effects on Politics: Support for Reforms by Age Groups.

7 Policy Choices and Demographics What is the best strategy to promote growth in the current situation: Structural reforms and/or Macroeconomic adjustment? Competing Economic Views: Reform Fundamentalists vs. Macro Adjustment Believers Role of Demographics and its effects on Politics: Support for Reforms by Age Groups.

8 Policy Choices and Demographics What is the best strategy to promote growth in the current situation: Structural reforms and/or Macroeconomic adjustment? Competing Economic Views: Reform Fundamentalists vs. Macro Adjustment Believers Role of Demographics and its effects on Politics: Support for Reforms by Age Groups.

9 Our Paper on Secular Stagnation We assess the importance of the age structure of population for the secular stagnation hypothesis We derive a mortality trend (using a Lee-Carter model), and combining it with the projected age structure of population to generate long term projections for the trend in output per capita and real interest rates for euro area economies. Our evidence shows that demographic based projections deliver for the next twenty years a lower long-run potential growth rate but a reversion of real interest rates to their historical mean. The increase in life expectancy with lower fertility increases the supply of savings, but aging and a higher share of old age population more than compensate this effect to deliver projected higher real rates.

10 Our Paper on Secular Stagnation We assess the importance of the age structure of population for the secular stagnation hypothesis We derive a mortality trend (using a Lee-Carter model), and combining it with the projected age structure of population to generate long term projections for the trend in output per capita and real interest rates for euro area economies. Our evidence shows that demographic based projections deliver for the next twenty years a lower long-run potential growth rate but a reversion of real interest rates to their historical mean. The increase in life expectancy with lower fertility increases the supply of savings, but aging and a higher share of old age population more than compensate this effect to deliver projected higher real rates.

11 Our Paper on Reforms We assess the role of age structure on productivity and labour markets, How do preferences for Structural Reforms depend on the age structure? Could the evidence on the empirical relationship between age structure and long-term growth be related to the impact of age structure on reforms in labour and product market? Political Economy of the debate on the best strategy to promote growth in the current situation: structural reforms view versus the macroeconomic adjustment view.

12 The Demographic Scenario for Europe We consider the Lee-Carter(1992) mortality model to derive a mortality trend that we will combine with the age structure of population in Europe (0-20, 20-39, and over 60) to generate demographic driven trends for real output and real interest rates. We analyze fifteen European countries (Austria, Belgium, Denmark, Spain, Finland, France, Great Britain, Germany, Ireland, Italy, The Netherlands, Norway, Portugal, Switzerland and Sweden) to generate a sample of 10 euro area countries and 5 non euro area countries. Data on mortality for annual sample are taken from the Berkeley Human Mortality Database website.

13 The Lee-Carter (1992) model The Lee-Carter (1992) model consists of a system of equations for logarithms of mortality rates for age cohort x at time t, ln[m x,t ], and a time-series equation for an unobservable time-varying mortality index k t : ln (m x,t ) = a x + b x k t + ɛ x,t (1) k t = c 0 + c 1 k t 1 + e t ɛ x,t NID ( 0, σɛ 2 ) e t MeanZero - Stationary Process

14 Four Hours a Day

15 Shares in different age groups

16 Demographic-based projections for output and real interest rates We then adopt a model for a panel regression in levels of the logarithm per capita GDP at PPP US dollars, y i,t, and the real long-term interest rate, rr i,t, on the logarithms of age shares, a j,i,t, and the Lee-Carter country-specific mortality trend k i,t : z i,t = β 1 k i,t j=0 19 β j a j,i,t + λ i + χ t + u i,t k i,t = c 0,i + c 1,i k i,t 1 + e i,t (2) where j = 0 19, 20 39, 40 59, 60+, z i,t = y i,t, rr i,t. The specification also includes a country fixed effect and time-dummies, the model is estimated by SURE to deal with cross-country correlations of residuals u i,t. We use the model to project within sample and out-of-sample, the variables to our interest, by taking the age shares as exogenous and using the UN Population Division projections.

17 Log of Per Capita real output

18 Real 10-year bond yields

19 Age Structure, Productivity, and Labour Markets During the last few decades, particularly in Europe, the quest for more economic growth has often been associated with the need of structural reforms the pace of reforms has been heterogenous. product market regulations, as measured by the OECD index (see Conway and Nicoletti, 2006), have dropped, albeit to a different degree, in several countries Liberalization of the labor market, as measured by the EPL index (OECD, 2006) has instead proved to be more difficult to achieve. Is there a relationship between age structure and the pace of reforms?

20 Product Market

21 Product Market

22 Labour Market

23 Age Structure and Product Market

24 Age Structure and Labour Market

25 Age Structure and Welfare State

26 Reforms and Age Structure of Population How does the Age Structure affect Structural Reforms? Product Market liberalize more when share of workers (20-39 and 40-59) is larger. Stronger Impacts in Energy and Communication. Pressure from Employment in Final Good Markets? More Labor markets deregulation (particularly EPL for temporary workers) when the share of young workers (20-39) is larger. More union density with high share of elderly. More Generous Welfare state (UB, Sick Pay) with larger shares of workers (40-59) and elderly Do these results reflect different preferences for Reforms among Age Groups?

27 Reforms and Age Structure of Population How does the Age Structure affect Structural Reforms? Product Market liberalize more when share of workers (20-39 and 40-59) is larger. Stronger Impacts in Energy and Communication. Pressure from Employment in Final Good Markets? More Labor markets deregulation (particularly EPL for temporary workers) when the share of young workers (20-39) is larger. More union density with high share of elderly. More Generous Welfare state (UB, Sick Pay) with larger shares of workers (40-59) and elderly Do these results reflect different preferences for Reforms among Age Groups?

28 Preferences for Reforms by Age We use 2014 Eurobarometer data for the previous countries (no data for Switzerland) on three broad issues: reforms, competition and globalization. need of reform: Our country needs reforms to face the future. from 1 (totally agree) to 4 (totally disagree) preferences for reform, liberalization, flexibilty: Could you please tell me whether the following term respectively reforms, liberalization and flexibility brings to mind something very positive, fairly positive, fairly negative or very negative?, from 1 (very positive) and 4 (very negative)

29 Preferences for Reforms by Age

30 Preferences for Competition by Age industrial competition: Please tell me how important or not you think in order for the EU to exit the present financial and economic crisis and prepare for the next decade is to help the EU s industrial base to be more competitive by promoting entrepreneurship and developing new skills from 1 (not at all important) and 10 (very important) preferences for competition: Could you please tell me whether the term competition brings to mind something very positive, fairly positive, fairly negative or very negative?, from 1 (very positive) and 4 (very negative)

31 Preferences for Competition by Age

32 Preferences for Globalization by Age globalization: Globalisation is an opportunity for economic growth from 1 (totally agree) to 4 (totally disagree) preferences for globalization and free trade: Could you please tell me whether the term respectively competition and free trade brings to mind something very positive, fairly positive, fairly negative or very negative?, from 1 (very positive) and 4 (very negative)

33 Preferences for Globalization by Age

34 Preferences for Reforms, Competition and Globalization Senior workers and Elderly are aware of the importance of competition, while they do not think that globalization is important for growth Regardless of their degree of awareness, Senior workers and elderly individuals have more strongly negative views on reforms, liberalization, flexibility, competitiveness, globalization and free trade than younger individuals. Other cleavages (gender, education, political orientation, etc) work as expected

35 The Current Debate: Structural reforms or Macroeconomic Adjustments Structural reforms are needed for growth Eggertsson et al. (2014) suggest that structural reforms may indeed prove detrimental in the short run, if decreases in wages lead to deflationary policies that cannot be accomodated by the central bank with a reduction in the interest rate. Gali and Monacelli (2014) have remarked that structural reforms, when asymmetric across countries, require asymmetric monetary policy to accompany them. Such policies cannot be implemented in a common currency area. Our evidence suggests that there may be political economy motivations to support one school of thought or the other. These motivations are likely to differ mainly across generations. Structural reforms in the labor and product markets have clear redistributive consequences.

36 Redistributive Effects of Reforms and Adjustments Labor market liberalizations may increase hiring, but they reduce the degree of production of the insiders, less generous unemployment benefits reduce the degree of insurance for those workers who were initially protected. Product market deregulations instead reduce the economic rents enjoyed in these protected markets. To the extent that elderly workers in these protected sectors are able to extract more rents, again an age cleavage may emerge. The same age divide would emerge in the preferences for welfare state retrenchment, since in most countries particularly in Southern Europe current social spending is massively targeted to the elderly. Neo-Keneysian macroeconomic adjustments may be less divisive. Given the large influence that elderly and insiders have on the political process that allocates public resources, these macroeconomic adjustments would most likely benefit the older generations

37 Redistributive Effects of Reforms and Adjustments Labor market liberalizations may increase hiring, but they reduce the degree of production of the insiders, less generous unemployment benefits reduce the degree of insurance for those workers who were initially protected. Product market deregulations instead reduce the economic rents enjoyed in these protected markets. To the extent that elderly workers in these protected sectors are able to extract more rents, again an age cleavage may emerge. The same age divide would emerge in the preferences for welfare state retrenchment, since in most countries particularly in Southern Europe current social spending is massively targeted to the elderly. Neo-Keneysian macroeconomic adjustments may be less divisive. Given the large influence that elderly and insiders have on the political process that allocates public resources, these macroeconomic adjustments would most likely benefit the older generations

38 Conclusions Demographic based projections deliver for the next twenty years a lower long-run potential growth rate but a reversion of real interest rates to their historical mean. Within this framework, polices for growth become feasible (no secular stagnation) and of crucial importance The implementation of such reforms will not be facilitated by the age structure of population. In a world of ageing population, structural reforms should obtain the political support of the young generations, but they will most likely get the opposition of the elderly. It should thus not be surprising if the older countries in terms of share of elderly people lean more towards macroeconomic adjustments, whereas younger nations again in terms of population share, are more supportive of structural reforms.

39 Reforms of the Product Market: Descriptive Evidence 0 NO EU ESM EURO -0,05-0,1-0,15-0,2 Australia, Canada, Japan, New Zealand, Norway, Switzerland, US Denmark, Sweden, UK Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Portugal, Spain -0,

40 Econometric Analysis Dependent variable: Regulation Index (sector-country-year) in Product Market; EPL or Unemployment Benefit (country-year) in Labor Market Explanatory Variables: Lagged dependent variable, sectorcountry-year fixed effects, SINGLEMKT, EMU, other controls SINGLEMKT = 1 if EU country and year 1993, 0 otherwise EMU = 1 if EMU country and year 1999, 0 otherwise GLS estimation allowing for heteroshedasticity IV for EURO (gravity equation model) EMU interactions: Sector Specific, Lagged dependent variable

41 Product Market ESM & EURO (1) (2) (3) REGNOPO REGNOPO REGNOPO REGNOPO(-1) (109.60)*** (107.19)*** (104.66)*** SINGLE MKT (2.28)** EMU (5.28)*** SINGLE MKT_ENERGY (0.61) (0.23) SINGLE MKT_COMMUNICATIONS (0.81) (0.81) SINGLE MKT_TRANSPORT (4.35)*** (4.05)*** EMU_ENERGY (9.07)*** (0.49) EMU_COMMUNICATIONS (5.74)*** (0.31) EMU_TRANSPORT (2.39)** (6.26)*** EMU*REG(-1) (6.24)*** Observations

42 Product Market Endogenous EURO 1 Stage 2 Stage emu emu emu emu population1sh (4.95)*** (5.35)*** (5.49)*** (6.14)*** prmse (1.82)* (2.20)** (0.43) (0.72) yrmse (4.45)*** (4.41)*** (4.44)*** (5.03)*** border (2.75)*** (3.31)*** (1.24) (1.46) comlang (4.54)*** (4.95)*** (3.78)*** (3.96)*** colony (1.60) (1.75)* (2.06)** (2.85)*** laginfldeveu (0.93) (0.62) laglnrtrade (6.02)*** (7.62)*** laglntrade (5.63)*** (6.91)*** laginflwdi (4.06)*** (5.11)*** Observations REGNOPO(-1) REGNOPO(-1) REGNOPO(-1) REGNOPO(-1) EMU (2.25)** (1.97)** (1.88)* (1.66)* Observations R-squared

43 Empirical Evidence ESM and EURO induce Deregulation in the Product Market, even when EURO is instrumented using gravity equation ESM had an impact on Deregulation in Transport EURO had an impact on Deregulation in Energy & Communication Effect of EURO was stronger in highly regulated countries, not true for the ESM Magnitudes: EURO in Switzerland in 2003 Energy (0.8 UK 4.4): 4.4 (1 st ) to 3.9 (3 rd, France) Communication (1.5 NZ 2.6 N): 2.5 (2 nd ) to 2.2 (13 th, Spain)

44 Product Market why Euro matters 3 SECTORS (1) (2) (3) REGNOPO(-1) REGNOPO(-1) REGNOPO(-1) REGNOPO(-1) (101.60)*** (92.94)*** (104.17)*** SINGLE MKT_ENERGY (0.12) (0.08) (0.23) SINGLE MKT_COMMUNICATIONS (0.84) (0.65) (0.83) SINGLE MKT_TRANSPORT (4.37)*** (3.89)*** (4.05)*** EMU_ENERGY (2.38)** (1.92)* (0.30) EMU_COMMUNICATIONS (1.95)* (1.56) (0.28) EMU_TRANSPORT (7.37)*** (6.66)*** (6.06)*** EMU*REG(-1) (7.94)*** (7.08)*** (5.51)*** COMPET1(-1) (0.96) (0.38) COMPET1^2(-1) (0.55) (0.11) EMU*COMPET1(-1) (2.81)*** (2.77)*** N. OF DEVALUATIONS FROM (3.46)*** EMU* N. OF DEVALUATIONS FROM (1.83)* Observations (Loss of) Competition at country level as growth rate relative to competitors of (i) cpi or (ii) export goods deflators