Discussion of the paper. Declining Trend in the Real Interest Rate and Inflation: The Role of Aging by S. Fujita and I. Fujiwara

Transcription

1 Discussion of the paper Declining Trend in the Real Interest Rate and Inflation: The Role of Aging by S. Fujita and I. Fujiwara Guido Ascari University of Oxford Bank of Finland & CEPR Conference on Demographics and the Macroeconomy Helsinki October 2017

2 Praise Very interesting paper on important topic Aim: uncover a supply-side novel mechanism to explain some facts linking macroeconomic developments to demographic trends Outline The facts How much this mechanism could explain this link? Some comments

3 The facts since the 1980s Macro Slowdown in growth Declining trend in real interest rate Declining trend in inflation and even deflation Demographics Ageing of population Declining birth rates Labour force is ageing => 3 years more Level of the labour force is falling

4 Facts: Demo

5 Facts: Demo

6 Facts: Macro

7 Facts: Macro

8 Key-mechanism Frictional labor market with two ingredients: Old experienced workers are more productive that young workers Firm-specific skills => old workers could loose their productivity premium when they loose the job Job-market segmentation depending on skills => 3 types of workers inexperienced young worker, experienced old worker, inexperienced old worker

9 Key-mechanism Implication of demographic trends Change in the composition of the labour force => more old workers Slow-movement changes in productivity that affect macroeconomic variables as inflation, the interest rate and consumption

10 Labour Force Composition and Productivity The young are the only source of productivity growth The more young people the higher the number of workers that upgrades their skills and becomes more productive The old are the only source of productivity decline The more old workers the higher the number of workers that looses their skills and becomes less productive Endogenous movements in productivity that depends on the flows in and out of the labour force To have a constant productivity one needs a constant composition but ageing changes the composition What happens when the entry rate is reduced?

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12 Labour Force Composition and Productivity Productivity initially increase because there are a lot of young workers that upgrade and fewer young workers that enter with a low productivity level Eventually there are fewer and fewer young people to upgrade and the number of old worker becomes so big that the effect of the productivity loss dominates and productivity slow down Level vs. growth: Productivity growth slowdown, but productivity level increases Then inflation, real interest rate and consumption growth decreases

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14 Comments 1: Timing The slowdown in productivity growth happens exactly around 1990, while in the model around

15 Comment 1 : Timing Maybe something has happened around 1990?

16 Comment 2: δ Older workers are more productive Demographic shifts composition towards older Then productivity should increase (but growth slowdown) Key ingredients: the skill specificity => this is fundamental, most (if not almost all) comes from it The author needs to convince us that this is important Not much to do with demographic actually High value of δ is needed 0.8 => initial steady state ¾ of old workers are unexperienced (33% of the labour force).gigantic skill loss!...and at the end even more Obsolescence in skill and innovation by young? maybe a different model where young innovate (Aksoy et al., 2016)

17 Comment 3: wage age premia Indeed, average wage for old is going sharply down lots of unexperienced old workers However average wage is going up because of composition and the premia between old and young is going down: TESTABLE IN THE DATA?

18 Comment 4: Unemployment

19 Comment 5: production function Perfect substitutability.ces in skills? Absence of capital accumulation => Shrinking labour force => Higher capitallabour ratio lower marginal product of capital and then real rate

20 Comment 6: Demand or Supply Consumption is proportional to productivity movements The real interest rate proportional to consumption growth via Euler equation Needed a substantial fall in productivity to explain the fall of the real interest rate below zero The model mechanism can not generate it

21 Comment 6: Demand or Supply

22 Comment 6: Demand or Supply Rely to much on supply side rather than demand to explain fall in real rate. Increase in life expectancy and retirement => Raise retirement period and therefore incentive to save which lowers real rate Carvalho et al. (2016)