Author: Junha Park (Bank of Korea), Dooyeon Cho (Sungkyunkwan University)

 This study investigates how the pattern of demand-side secular stagnation changed in countries such as Korea, the US, and Japan before the COVID-19 pandemic. First, we analyze how the natural rate of interest is determined theoretically using the overlapping generations model with imperfect competition in a goods market and with liquidity constraints imposed on the household. A firm's mark-up rate plays a key role as a wedge between the natural rate of interest and the marginal product of capital. In particular, we find that with an additional condition, an increase in the mark-up ratio reduces the natural interest rate without affecting the marginal product of capital. Based on a theoretical analysis, we also empirically analyze whether a decline in natural interest rates in Korea, the US, and Japan is caused by capital accumulation or by an increase in the markup. The estimation results indicate that while natural interest rates in each country tend to fall and the marginal product of capital in Korea and Japan also declines in a trend, the marginal product of capital in the US shows a distinct pattern compared to the trend of declining natural interest rates. This implies that, unlike the case for Korea and Japan, the decline in the natural interest rate in the US appears to result from the markup rather than capital accumulation.