Discussion Paper Details

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Title: Secular Trends and Technological Progress

Author(s): Robin Döttling and Enrico C Perotti

Publication Date: December 2017

Keyword(s): excess savings, House Prices, Human Capital, Intangible Capital, mortgage credit and skill-biased technological change

Programme Area(s): Financial Economics and Macroeconomics and Growth

Abstract: Can technological progress explain secular stagnation? We show how an excess of savings over investment arises when innovative production requires creative human capital rather than physical investment. Innovating firms cannot own human capital so they need less investment financing, but need to ensure the commitment of human capital by rewarding it gradually over time. Over time, as innovators are granted a rising income share, the supply of investable assets falls. The general equilibrium effect is declining corporate leverage, a gradual fall in interest rates and rising asset valuations. The concomitant rise in house prices and wage inequality leads to higher household leverage and mortgage default risk. We show that only a redistributive productivity shift can account for a fall in physical investment in the context of falling interest rates, consistent with major economic and financial trends since 1980.

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Bibliographic Reference

Döttling, R and Perotti, E. 2017. 'Secular Trends and Technological Progress'. London, Centre for Economic Policy Research.