A major factor driving the slowdown is a dramatic decline in the growth rate of “total factor productivity,” or TFP, a measure of innovation and technological change.3 As Bob Gordon has taught us, U.S. productivity growth tends to cycle between periods of high growth in decades following fundamental breakthroughs in science and technology, and relatively fallow periods of steady, incremental improvements. All the evidence indicates that we are in one of the latter periods of “normal” productivity growth of 1 - 1.5 percent per year, and that things will likely stay that way until the next scientific or technological revolution.4  R-star Descends These global shifts in demographics and productivity have two important implications for the future of our economies and for monetary policy. First, slower population and productivity growth translate directly into slower trend economic growth. Second, these trends have contributed to dramatic declines in the longer-term normal or “neutral” real rate of interest, or r-star. Slower trend growth reduces the demand for investment, while longer life expectancy tends to increase household saving.5 This combination of lower demand for and higher supply of savings, along with other factors, has pushed down r-star. With open capital markets, these global changes in supply and demand affect r-star globally. The evidence of a sizable decline in r-star across economies is compelling.
This experience of slow recovery and persistently low inflation is a symptom of a deeper problem afflicting advanced economies—the root cause of which is a combination of low neutral interest 1/4  BIS central bankers' speeches  rates and the lower bound on interest rates, a topic to which I now turn. What’s Past Is Prologue Underlying these events has been a sea change in the supply side of economies, owing to fundamental shifts in demographics and productivity growth. Two demographic trends are evident: People are generally living longer and population growth is slowing. Overall life expectancy in member countries of the Organisation for Economic Cooperation and Development (OECD) has increased from about 65 years in the 1950s to nearly 80 years today, and is projected to exceed 90 years by the end of this century (Figure 6). 1 Despite this increase in longevity, dwindling birth rates are bringing population growth to a standstill. In OECD countries, population growth averaged over 1 percent back in the 1950s and 1960s, but is now running at half a percent per year, and is expected to gradually fall before dipping into negative figures by 2070 (Figure 6).2 When it comes to productivity, the changes are no less dramatic. In OECD economies, growth in labor productivity—the amount produced per worker hour—has averaged a little over 1 percent per year since 1995, about half the pace seen over the prior decade (Figure 7).