WARNING SIGNALS
Reading Crisis Economics
Focus on: Secular Stagnation
Source : VoxEu - A. Gottfries & C. Teulings
The notion of secular stagnation goes back to Alvin Hansen’s 1938 presidential address, “Economic Progress and Declining Population Growth”. The idea received new interest after Larry Summers’ speech at the IMF last year. At the heart of the debate is the steady decline in the real interest rates since 1980 (see the ebook edited by Coen Teulings and Richard Baldwin 2014 for an overview).
The nominal interest rates for the Eurozone, US, and UK have been virtually zero since the onset of the Global Crisis. Figure 1 shows the average real interest over the business cycle for the Eurozone and the US, showing a steady decline over the last three business cycles.
The secular stagnation hypothesis claims that this downward trend has driven the full employment real interest rate (FERIR) into the negative territory. Hence, it will be increasingly difficult for monetary policy to achieve full employment due to the zero lower bound.
Olivier Blanchard, Davide Furceri, and Andrea Pescatori summarise the potential explanations for the decline in the real interest rate in their contribution to the ebook, discussing the role of monetary policy, of a shift in the composition of net demand for assets towards safe assets, and trends in supply and demand for loanable funds. As we will argue in this column, demography has played an important role in the downward trend in the real interest rate, in particular the rise in life expectancy. (...) Read the full article
Can Demography Explain Secular Stagnation ? - T. Gottfries & C. Teulings
SUMMARY - According to C. Teulings and A. Gottfries demography can explain a big part of the current stagnation in the major economies. Through their modeling they found that the decline in growth population with the increase in life expectancy without any change at the retirement age has led to an increase in stock savings. These new savings have created a downward pressure on interest rates. But investement was not "enough" to absorbe the whole demand. This excess demand has found refuge on long term fixed yield and supply assets like real estate. In the absence of long term investment opportunities, people prefere to create "rationale bubbles".