2023 Volume 26 Pages 1-19
This paper develops an overlapping-generations North-South trade model of secular “stagnation” where technological progress in a knowledge-labor-intensive service sector leads to the excess supply of capital, and hence to a decline in the natural real rate of interest. Skill-biased technological progress in the service sector increases the wage rate and the effective income, the savings used for consumption when being old, for knowledge workers. Technological progress, however, can lower low-skilled workers’ effective income through a decline in the real interest rate. International trade in goods, services, and capital of the North with the capital-hungry South does not change the balance between supply and demand for capital in the long run, and the North’s secular “stagnation” spreads to the entire world.