What I learnt about growth policy at the World Bank
Brian Pinto 17 December 2014
Since the Global Crisis, concerns have grown that advanced economies are suffering from secular stagnation. This column discusses the lessons that can be learnt from the economic transition of central and eastern Europe and the emerging-market crises of the late 1990s and early 2000s. Structural reform is particularly costly in the context of a debt overhang and an overvalued exchange rate. However, the crux is not debt restructuring per se, but whether economic governance changes credibly for the better following it.
Growth concerns have gone global. Advanced economies are beset by fears of secular stagnation, the IMF recently cut estimates of potential growth in emerging markets by 1.5 percentage points relative to 2011, and G20 leaders approved 800 new measures at Brisbane 2014 for raising G20 GDP by an incremental 2.1% by 2018.1
Development Institutions and economics
growth, secular stagnation, emerging markets, World Bank, structural reform, Transition economies, financial crisis, global crisis, debt overhang, exchange rates
Causes of the G7 fixed investment doldrums
Kristina Morkunaite, Felix Huefner 27 November 2014
The post-Crisis G7 economies have suffered weak business investment despite record low interest rates and the favourable financial positions of corporates. Some consider this the ‘new normal’ arising from secular, supply-side forces that have contributed to declining potential growth rates. This column argues that structural factors alone are not sufficient to explain the current weakness in investment rates. There is thus room for positive surprise if companies realise the pent-up investment demand.
Investment has been disappointing in recent years
Growth in mature economies has consistently disappointed in the years following the Global Crisis, and forecasts are regularly being revised downwards – just recently again by the IMF. An important part of the sluggish recovery in mature economies has been weak fixed investment. Total investment relative to GDP in the G7 economies stood at 19.3% in 2013 – a decline of 2.6 percentage points relative to 2007.
Global crisis Global economy
global crisis, investment, secular stagnation, monetary policy, interest rates
Reflections on the new 'Secular Stagnation hypothesis'
Lawrence H. Summers 30 October 2014
The notion that Europe and other advanced economies are suffering secular stagnation is gaining traction. This column by Larry Summers – first published in the Vox eBook “Secular Stagnation: Facts, Causes and Cures” – explains the idea. It argues that a decline in the full-employment real interest rate coupled with low inflation could indefinitely prevent the attainment of full employment.
Just seven years ago all seemed well in the field of macroeconomics. The phrase 'great moderation' captured the reality that business cycle volatility seemed way down from levels of the first part of the post war period. A broad methodological consensus supported the use of DSGE (dynamic stochastic general equilibrium) models to understand macroeconomic fluctuations and to evaluate macroeconomic policies.
Europe's nations and regions Macroeconomic policy
Investing for Europe’s future
Mateusz Szczurek 05 September 2014
The ‘lost decade’ is not a scenario for the EU, it’s the baseline forecast. In this column, Polish Finance Minister Mateusz Szczurek calls for an EU-wide public investment programme of 5.5% of GDP to overcome the constraints behind Europe’s ‘secular stagnation’. He calculates that €700 billion of capital expenditures could close the output gap in the short term while increasing long-term productivity growth. Funded by EU members and private leverage, it could operate as a special-purpose vehicle under the EIB.
Editor’s note: This speech was delivered by Mateusz Szczurek, Minister of Finance of Poland, last night at the annual Bruegel dinner.
The Bruegel Institute is one of the most influential European think-tanks and the quality of its research is continuously increasing its impact on policymaking. It is therefore my honour and great privilege to be here and to address this exceptional audience.
Macroeconomic policy Productivity and Innovation
lost decade, secular stagnation, European Fund for Investments
Secular stagnation: Facts, causes, and cures – a new Vox eBook
Coen Teulings, Richard Baldwin 10 September 2014
The CEPR Press eBook on secular stagnation has been viewed over 80,000 times since it was published on 15 August 2014. The PDF remains freely downloadable, but as the European debate on secular stagnation is moving into policy circles, we decided to also make it a Kindle book. This is available from Amazon; all proceeds will help defray VoxEU expenses.
Teaser from original column posted on 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.
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