Olivier Blanchard, Davide Furceri, Andrea Pescatori, 15 August 2014

From a peak of about 5% in 1986, the world real interest rate fell to about 2% before the Global Crisis, and to approximately 0% in 2012. This chapter discusses the major factors behind this decline both before and during the Crisis, and argues that most of them are still relevant. Indeed, the legacies of the Crisis may imply an even lower natural rate in future. This would be bad news for monetary policy, but good news for fiscal policy and debt overhang.

Gauti Eggertsson, Neil Mehrotra, 15 August 2014

Japan’s two-decade-long malaise and the Great Recession have renewed interest in the secular stagnation hypothesis, but until recently this theory has not been explicitly formalised. This chapter explains the core logic of a new model that does just that. In the model, an increase in inequality, a slowdown in population growth, and a tightening of borrowing limits all reduce the equilibrium real interest rate. Unlike in other recent models, a period of deleveraging puts even more downward pressure on the real interest rate so that it becomes permanently negative.

Robert J. Gordon, 15 August 2014

US real GDP has grown at a turtle-like pace of only 2.1% per year in the last four years, despite a rapid decline in the unemployment rate from 10% to 6%. This column argues that US economic growth will continue to be slow for the next 25 to 40 years – not because of a slowdown in technological growth, but rather because of four ‘headwinds’: demographics, education, inequality, and government debt.

Juan F Jimeno , Frank Smets, Jonathan Yiangou, 15 August 2014

In the Eurozone, rising dependency ratios, tougher financial regulation, debt overhang, and poor productivity growth are exerting downward pressure on equilibrium real interest rates. A key question is whether these trends are truly ‘secular’, or whether policy can improve matters. This chapter argues that there is significant scope to increase the efficiency of financial intermediation in the Eurozone, and that the potential for structural reforms remains much greater than in other advanced economies. Reforms that could help avoid secular stagnation in the long run would also boost demand today.

Guntram Wolff, 15 August 2014

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.

Barry Eichengreen, 15 August 2014

Pessimists have been predicting slowing rates of invention and innovation for centuries, and they have been consistently wrong. This chapter argues that if the US does experience secular stagnation over the next decade or two, it will be self-inflicted. The US must address its infrastructure, education, and training needs. Moreover, it must support aggregate demand to repair the damage caused by the Great Recession and bring the long-term unemployed back into the labour market.


CEPR Policy Research