Growth Theory and Demographics (Wonkish)
With the Fed/QE singularity still dominating the markets I thought it would be time for an academic digression since I am sure you don't need me to point you to sources on the current market climate (especially not in earnings spam week).
The one is a real treat and essentially is a literature review of how endogenous growth theory has incorporated the issue of population ageing into growth in the long run. It is written by Klaus Prettner and Alexia Prskawet and is out of the Vienna Institute of Demography which is one of the top 3 (in my opinion) constellations that produce material on the link between demographics and macroeconomics.
The purpose of this article is to identify the role of population size, population growth and population ageing in models of endogenous economic growth. While in exogenous growth models demographic variables are linked to economic prosperity mainly via the population size, the structure of the workforce, and the capital intensity of workers, endogenous growth models and their successors also allow for interrelationships between demography and technological change. However, most of the existing literature considers only the interrelationships based on population size and its growth rate and does not explicitly account for population ageing. The aim of this paper is (a) to review the role of population size and population growth in the most commonly used economic growth models (with a focus on endogenous economic growth models), (b) discuss models that also allow for population ageing, and (c) sketch out the policy implications of the most commonly used endogenous growth models and compare them to each other.
As you migth remember I started a blog series some time ago on macroeconomics and demographics and in the first post (second is coming soon on demographics and asset prices) I basically laid out some picture points in the context of life cycle theory and demographics. One of these topics included growth which in itself is illusive but also a topic which almost deserves its own label outside traditional macroeconomics since it is a field which is so vast yet pretty strict in methodological terms. The paper by messieurs Prettner and Prskawet is a very good re-cap of the literature (I am definitely going to read 5-6 papers on their ref list) and brings you up to date on how growth theorists model the effect of population ageing on growth in the long run.
The general conclusion is, contrary to the classical Solow model, that population dynamism is positively related to growth or that population ageing is a drag on growth in the illusive steady state. This comes with some qualifiers of course, but as I read the evidence it is pretty much overwhelming from the models we already have. This is an intuitive result, but also a big one in relation to growth theory where the incorporation population ageing has been very long time underway. Moreover, since the contributions who stipulate this are only from the second half of the first decade of the 21st century I think we can call this an advance of no small nature!
So far so good then.
However, apart from the strides made in the context of growth theory I also asked the question of whether steady state growth theory, in general, was suited to explain the phenomena we really would like to explain. Specifically, I said ...