Under secular stagnation it is, as summers argues, a fiscal expansion. Secular stagnation and monetary policy by lawrence h. Secular stagnation and monetary policy federal reserve bank of. Summers this article is based on the authors homer jones memorial lecture delivered at the federal reserve bank of st. The secular stagnation project will shed light on and explore policy responses to a pressing worldwide issue, which up to this point, has received limited rigorous study. 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. So far it is difficult to find statistical evidence for a secular slowdown. The cepr press ebook on secular stagnation has been viewed over 80,000 times since it was published on 15 august 2014. Secular stagnation institute for new economic thinking. The economist explains what it means to suffer from. National association for business economics, 33rd economic policy conference.
Modern discussions of secular stagnation point to the decline in real interest rates since. Secular stagnation, hysteresis, and the zero lower bound lawrence h. The concept of secular stagnation originally formulated by the eminent depressionera economist alvin hansen, has experienced a revival since my. In economics, secular stagnation is a condition when there is negligible or no economic growth in a marketbased economy. Nonkeynesian e ect giavazzi and pagano 1990, alesina and perotti 1996, alesina and ardagna 1998, and perotti 1999. April 14, 2017 abstract this paper formalizes and quanti. The extraordinary events needed to pull the economy out of depression as well as the recent weakness suggest that it is worth considering secular stagnation. Stefano di bucchianico roma tre university political economy workshop 19th september 2017. The deep causes of secular stagnation and the rise of. Summers purchase article listen to article purchase audio as surprising as the recent financial crisis and recession were, the behavior of the worlds industrialized economies and. In the aftermath of the great recession recovery in united states and the eurozone has been sluggish and unsatisfying in terms of growth and unemployment reduction.
E31,e32,e52 abstract we propose an overlapping generations new keynesian model in which a permanent or very persistent. This debate has forwarded both demand and supplyside arguments regarding the pros and cons of secular stagnation. Secular stagnation and the relative price of investment goods gregory thwaites lse and bank of england first version. The present paper emphasizes the role of demand, income distribution, endogenous productivity reactions, and other structural changes in the slowdown of the growth rate of output and productivity. Im gratified that there seems to be general acceptance of the core secular stagnation argument. We evaluate the global macroeconomic effects of crosscountrycoordinated fiscal and monetary policies to counterbalance secular stagnation by simulating a fiveregion new keynesian model of the world economy, calibrated to the united states us, the euro area, japan, china, and the rest of the world. Fukao kyoji hitotsubashi university and rieti ikeuchi kenta national institute of science and technology policy. The us economy has experienced a slowdown in its longterm growth. What mainstream economists get wrong about secular stagnation. On falling neutral real rates, fiscal policy, and the risk of secular.
Reflections on secular stagnation princeton university. The bursting of the bubble economy ushered in an era of zero interest rates and unconventional monetary policy, long before such measures were widely adopted elsewhere during the global financial crisis. Facts, causes and cures a cepr press a 9 781907 142772 cepr press isbn 9781907142772. By contrast, our model does not suffer from these coun terfactual dynamics. The economist explains what it means to suffer from secular stagnation. Secular stagnation in japan and abroad for over two decades now, japan has found itself at the forefront of economic policymaking. Much of this concern arises from the longrun effects of shortrun developments and the inability of monetary policy to accomplish much more. Under some definitions, slow means significantly slower than potential growth as estimated by macroeconomists, even though the growth rate may be nominally higher than in other countries not experiencing economic stagnation. Lawrence summers deserves a nobel prize for reviving the. Now, instead of being concerned with minor adjustments to stabilize about a given trend, concern is focused on avoiding secular stagnation.
February 5, 2020 october 12, 2017 by tejvan pettinger. Economists, such as larry summers have written on secular stagnation arguing the world has entered a period of substantially lower economic growth. Secular stagnation refers not to the literal stagnation, i. His main thesis of secular stagnation was aimed at showing the inherent instability of the capitalist system. This raises profound questions about stabilization policy going forward. The threat of secular stagnation has not gone away. Those with very high incomes have a relatively low propensity to consume, and virtually all the income gains in. The orthodox view on secular stagnation seems to adopt one of two perspectives. This article provides hansens expertise guide to secular stagnation of business cycle. Conditions of secular stagnation low interest rates, below target inflation, and sluggish output growth now characterize much of the global economy. Explaining the world, daily the economist explains. Secular stagnation in the form of slow poten tial output growth over the past halfdecade reflects the slowness of growth in both labor productivity and in aggregate hours of work, and slow growth in the latter is due both to slowing population growth and to a decline in the labor force participation rate lfpr. Pdf demand, distribution, productivity, structural. I have taken the liberty to transcribe summers answer i added line breaks and numbers from 1 to 5 to distinguish the five possible causes mentioned by summers.
On falling neutral real rates, fiscal policy, and the risk of secular stagnation. Secular stagnation under the fear of a government debt crisis. So secular stagnation as an issue remains very much alive. The nature of macroeconomics has changed dramatically in the last seven years. In the late 1930s hansen hypothesized that the united states economy had reached secular stagnation and would never grow as fast as it had before because all the important ingredients for growth had been exhausted. Secular stagnation lost decades many our focus is on a scal channel. Equilibrium in the new situation should occur at r1 which is negative. There has been an outpouring of chat in both policy circles and the blogosphere concerning secular stagnation. Economic fluctuations and growth, monetary economics conditions of secular stagnation low interest rates, below target inflation, and sluggish output growth now characterize much of the global economy.
In this paper, webuild a model that allows us toconsider theideas of secular stagnation and expectationsdriven liquidity traps in a uni ed setting. Secular stagnation and returns on capital economic. On falling neutral real rates, fiscal policy, and the risk. Freeland asks summers about the causes of secular stagnation at 28 minutes, 23 seconds in the video. On secular stagnation in the industrialized world brookings. The economist explains how will recent primary reforms change the. This ebook gathers the views of leading economists including larry summers, paul krugman, bob gordon, olivier blanchard. Normal policy settings of real interest rates in the 2 percent. Following his consequential speech at the imf, a large macroeconomic literature in new keynesian economics has emerged on the secular stagnation. By focusing on the impacts of the 2008 financial crisis, ball 2014 concludes that on average countries loss 8. The debate about the new secular stagnation hypothesis has gained momentum and many facets have recently been added. Professor of economics, american university, washington, dc 20016, usa. In this context, the term secular means longterm from latin saeculumcentury or lifetime, and is used in contrast to cyclical or shortterm. Consequently the level and rate of change of private debt could have been macroeconomically significant not merely since 2008, but since as long ago as 1985.
In countries with symptoms of secular stagnation, more monetary and fiscal stimulus should be accompanied by structural reforms to boost potential growth and. It suggests a change of fundamental dynamics which would play out only in its own time. Facts, causes and cures edited by coen teulings and richard baldwin centre for economic policy research 77 bastwick street, london ec1v 3pz tel. To see how we can get secular stagnation in such a loanablefunds world, we introduce a shock, say, an ageing population a demographic imbalance, a rise in extreme inequality, or an asian savings glut, due to which the savings schedule shifts down. The original theory of secular stagnation is generally attributed to the great depression era harvard economist alvin hansen. Economic stagnation is a prolonged period of slow economic growth traditionally measured in terms of the gdp growth, usually accompanied by high unemployment.
With donald trump voted in as the 45 th us president, the world economy has witnessed another sobering reminder of the rise of populism, inwardlooking politics and a sweeping antiestablishment wave, having. Summers the nature of macroeconomics has changed dramatically in the last seven years. Last month in this space i argued that we may be in a period of secular stagnation in which sluggish growth, output and employment at levels well below potential, and problematically low real interest rates might coincide for quite some time to come. Of late, the world bank, the international monetary fund imf. July 24 2014 secular stagnation, debt overhang and other rationales for sluggish growth, six years on by. The us must work on its economic relationship with china. Current palliatives are appropriate but unlikely to be longterm solutions. In particular, secular stagnation has been studied in models with heterogeneous agents eggertsson, mehrotra and robbins, 2019. The age of secular stagnation what it is and what to do about it by lawrence h. New research from lukasz rachel of the london school of economics and bank of england and harvard economist. But if the problem is a global savings glut then the right policy is to focus on what is driving the situation i. Gordon alvin hansen 1939 popularized the term secular stagnation, and we are now, at the suggestion of larry summers 2014, considering the application of hansens term to the current us economy, because the pace of out.
Ben bernanke looks at the question of whether the u. Six years after the global crisis, the recovery is still anaemic despite years of nearzero interest. The standard economic models are not equipped to address this unique interest rate environment and the situation presents multiple lines of inquiry that deserve exploration. He studied fluctuations in national income suggested measures for steady growth. Secular stagnation is a term coined to describe a prolonged period of lower economic growth.
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