Source : VoxEu - G. Wolff

 

The persistence of low Eurozone inflation undermines private and public debt sustainability – especially in the periphery where the overhang is greatest. However, since bubbles and unsustainable borrowing supported demand before the Global Crisis, this chapter argues that higher inflation cannot be a permanent cure for secular stagnation. Instead, a targeted quantitative easing programme and increased public investment would help rebalance Eurozone demand. At the global level, population growth in Asia and Africa will provide ample investment opportunities if they can be fully integrated into the world economy.

 

Larry Summers crystallised an important development and question in a recent speech given at the IMF research conference: Has the world economy entered a period of ‘secular stagnation’? The slow recovery in the US since the Global Crisis is his starting point and he argues that secular stagnation could also retrospectively explain features of previous decades such as low inflation. Summers thereby picked up an old term from Alvin Hansen (1939), who used it in the Presidential Address of the American Economic Association in 1938. Back then, Hansen focused on the importance of (public) investment expenditure to achieve full employment. His argument was that for such investment to happen, the economy needs new inventions, the discovery of new territory and new resources, and finally population growth.

 

Summers’ argument is centred on the fact that inflation rates have been falling in the past two decades and have been mostly lower than expected. Has there been a permanent fall in the equilibrium real interest rates? Do our economies need real interest rates of -2% or -3% to generate enough demand to achieve full employment? Is the fact that inflation rates were so low and even falling over the last decades really a sign that the global economy was suffering from a permanent demand weakness? Was there really no demand excess? (...) Read the full article