Secular stagnation: Facts, causes, and cures – a new Vox eBook
Coen Teulings, Richard Baldwin 15 August 2014
Six years after the Crisis and the recovery is still anaemic despite years of zero interest rates. Is ‘secular stagnation’ to blame? This column introduces an eBook that gathers the views of leading economists including Summers, Krugman, Gordon, Blanchard, Koo, Eichengreen, Caballero, Glaeser, and a dozen others. It is too early to tell whether secular stagnation is really secular, but if it is, current policy tools will be obsolete. Policymakers should start thinking about potential solutions.
Economic growth is still anaemic despite years of zero interest rates.
- Is ‘secular stagnation’ to blame? What does secular stagnation really mean? And if it’s for real, what must be done?
Today, VoxEU.org launches an eBook that gathers the views of leading economists including Summers, Krugman, Gordon, Blanchard, Koo, Eichengreen, Caballero, Glaeser and a dozen others (edited by Coen Teulings and me). Collectively, the chapters suggest that something historic is afoot.
Global crisis Macroeconomic policy Monetary policy
interest rates, US, Europe, Japan, investment, macroeconomics, Great Recession, zero lower bound, savings, secular stagnation, SecStag debate
Low interest rates and secular stagnation: Is debt a missing link?
Claudio Borio, Piti Disyatat 25 June 2014
Real interest rates have fallen to historic lows, and some economists are concerned that an era of secular stagnation has begun. This column highlights the role of policy frameworks and financial factors – particularly debt – in linking low real interest rates and sluggish economic growth. Policies that do not lean against booms but ease aggressively and persistently in busts induce a downward bias in interest rates over time and an upward bias in debt levels – something akin to a debt trap. Low real interest rates may thus be self-reinforcing and not always ‘natural’.
Today, the US government can borrow for ten years at a fixed rate of around 2.5%. Adjusted for expected inflation, this translates into a real borrowing cost of under 0.5%. A year ago, real rates were actually negative. With low interest rates dominating the developed world, many worry that an era of secular stagnation has begun (Summers 2013).
Financial markets Global crisis Monetary policy
interest rates, monetary policy, global crisis, debt, secular stagnation, risk-taking channel of monetary policy, natural rate of interest, monetary non-neutrality
On the causes of secular stagnation: China, relative prices, and the collapse of manufacturing
Douglas L. Campbell 15 April 2014
The secular stagnation hypothesis is back. Several prominent economists claim that the US may have entered a prolonged period of anaemic economic growth caused by weak aggregate demand. This column argues that the build-up of trade deficits caused by the appreciation of the dollar can explain most of the decline in manufacturing employment, output and investment in the US. Aggressive monetary policy targeted at increasing inflation could help by effectively taxing the inflow of foreign reserves, thereby leading to a depreciation of the dollar.
The 2000s began with the Fed narrowly missing the zero lower bound on short-term interest rates; they ended with the US ensnared in a liquidity trap. Even the economic boom from 2003 to 2007, despite being driven by a housing bubble, was lacklustre by US post-war standards. This has led economists such as Larry Summers to argue that the US may have entered a period of secular stagnation characterised by a prolonged shortfall in aggregate demand. Such shortfalls, Summers asserts, call for very aggressive stabilisation policies just to ensure normal growth.
International finance International trade
trade deficit, secular stagnation, aggregate demand
Europe’s banking problem through the lens of secular stagnation
Jan Willem van den End , Jakob de Haan 28 March 2014
While many economists argue that demand stimulus is needed, this column argues that supply side measures are necessary to avoid secular stagnation. In the Eurozone, it is necessary to clean up and strengthen the balance sheets of banks, which can kick-start the flow of new lending. The comprehensive assessment by the ECB is an important step in this direction.
What is the economy’s new normal? Will it be secular stagnation as suggested by Summers (2013)? According to this view, the economy will be in a permanent state of recession because aggregate demand is below potential output. As the actual real interest rate exceeds the negative equilibrium real interest rate (the natural rate), investment activity is too low. In the secular stagnation view, the zero lower bound (ZLB) prevents an adjustment of the interest rate to the (negative) equilibrium rate. Consequently, the economy ends up in a liquidity trap (Krugman 2013).
Financial markets Monetary policy
ECB, balance sheets, secular stagnation