Put aside the mathematics and jargon for a couple minutes. If you had to explain the concept of secular stagnation to an (intelligent) person with no economics background, how would you go about doing so?

If you want to use terms like "zero lower bound" or "tight money" ... explain them thoroughly!


1 Answer 1


Quoting from Coen Teulings C and Richard Baldwin R (ed.) (2014) Secular Stagnation: Facts, Causes and Cures

"(...) A workable definition of secular stagnation is that negative real interest rates are needed to equate saving and investment with full employment. (p.2)"

Later on they write (p.10)

"Low real interest rates play a linchpin role in the secular stagnation debate for two reasons.
First, if real rates are low in normal times, adverse macroeconomic shocks are more likely to require negative real rates to restore a full-employment investment-savings balance. In today’s low-inflation environment, this tends to undermine the effectiveness of monetary policy.
Second, low nominal and real interest rates undermine financial stability. Summers (i.e. Larry Summers, the economist that brought back the concept of Secular Stagnation) lists three channels through which low rates may foster instability:
(i) they increase risk-taking as investors reach for yield;
(ii) they promote irresponsible lending as coupon obligations become very low and easy to meet; and
(iii) they make Ponzi financial structures more attractive as interest rates look low relative to expected growth rates."

So if interest rates tend to be low, the need to push them down even more in order to deal with macroeconomic shocks, may lead to financially-born crises.

So why interest rates have historically fallen? From the supply side (i.e. savings behavior/supply of loans) factors like,
a) increase in life expectancy
b) lower retirement age, and
c) the decline in the growth rate of the population,
tend to increase required life time savings - required in order to smooth life-time consumption (at the individual level this goes like this: projecting that we will live more, and stay in pension for more years, we tend to save more during our working years). I will add that supply of loans will tend to increase with wealth inequality.

The effect from the demand side (i.e. investment behavior/demand for loans) is much less agreed upon, but it appears that the revolution of the Information Technology (IT) sector had a negative effect on this aspect, since it reduced the value of the investments needed. The authors write

"The key is that the development of high value-added services by Google, Microsoft, Amazon, Facebook and the like require relatively little investment.

So the loan supply schedule shifted outwards, while the loan demand scheduled shifted inwards. Schematically.

enter image description here

which creates the needed environment for Secular Stagnation, if it goes too far down.

Of course this is not the whole story. The above e-book by CEPR is freely downloadable.


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