Stochastic Demographic Dynamics, Long-memory and Economic Growth∗

This paper exploits for the first time the temporal dynamic features of de-mographic system in economic growth model. Standard practice in economic growth models has been to treat population growth as either constant, exoge-nous, and/or stationary to ensure that long-run equilibrium characteristics of an economy is not affected by non-mean converging demographic shocks. Rather, the stand-in practice has been to allow (endogenous) technological change or human capital to play crucial role in determining long-term equilibrium. We argue in this paper against the stationary assumption of demographic system (broadly the population growth) and show empirically that population growth follows a long-memory process. Using a stochastic version of the Solow-Swan model, we demonstrate analytically as well as with simulation example the ef-fect of long-memory demographic shocks on economic growth. The general conclusion is that stochastic demographic system has had discernible impact on economic growth in the past four decades and that the source of long-memory i