Secular stagnation: The second best solution

Posted: January 21, 2014 in economy
Tags: , ,

WITH a string of talks and op-ed columns, Larry Summers has revived discussion in the “secular stagnation” hypothesis. Income has become concentrated in the hands of groups, like reserve-accumulating foreign governments and the rich, with low propensities to consume, the thinking goes. That has generated excess saving and pushed down real interest rates until they are substantially negative at many durations. That, in turn, has made life very difficult for central banks, which have struggled to stoke up adequate demand with nominal interest rates wedged up against zero.Mr Summers identifies three broad solutions to the problem. One is to do nothing, or not much anyway, on the demand side. This is not a particularly attractive solution, as it implies a very long slump in which incomes are lower than they need to be, unemployment is higher, and the economy’s potential is eroding. Another is to raise inflation expectations in order to reduce real, or inflation-adjusted, interest rates until demand is where we’d like it to be. This policy is not without its downsides, says Mr Summers. In an interview with Ezra Klein, he noted:First, there are the questions of just how productive will be the investments that are not attractive at a negative real rate but only become attractive at a more negative real rate, and how much incremental investment will be stimulated. Most observers …

via Economic Crisis http://ift.tt/1cPEYXI

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