The Secular Stagnation Hypothes is and the Future of Europe’s Advanced Economies
DOI:
https://doi.org/10.12797/Politeja.17.2020.66.03Keywords:
secular stagnation, natural rate of interest, advanced economies, central banking, zero lower boundAbstract
The secular stagnation hypothesis originated in the late 1930s when Alvin Hansen proposed that the American economy will experience a prolonged depression because of the slowdown in demographics. Widely discussed in the aftermath of the Great Depression, interest in this hypothesis has waned as the world entered a period of rapid economic growth after World War II. In the years following the Great Recession, the secular stagnation hypothesis has once again come to the forefront of economic research when Lawrence Summers introduced the so‑called “new secular stagnation hypothesis.” This article aims to establish whether the secular stagnation hypothesis is relevant to the future of Europe’s advanced economies. Two main symptoms of secular stagnation (demographic slowdown and decline in the natural rate of interest) are especially noticeable in Western Europe. The article has three parts. Part one contains a theoretical overview of the secular stagnation hypothesis. Part two comprises the empirical analysis of the macroeconomic situation in selected advanced economies in Europe and a short review of findings in the literature on the natural rate of interest. Part three identifies possible future problems and provides brief policy recommendations. I conclude that Italy, and to a lesser degree, Spain and Germany, are the countries most vulnerable to secular stagnation.
Downloads
References
Alesina A., Summers L.H., “Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence”, Journal of Money, Credit and Banking, vol. 25, no. 2 (1993).
Arnold M., Draghi faces chorus of criticism over fresh stimulus, The Financial Times, https://www.ft.com/ (2019), https://doi.org/10.2307/2077833. DOI: https://doi.org/10.2307/2077833
Arnold M., Weidmann warns he will oppose expanded ECB bond buying, The Financial Times, https://www.ft.com/ (2019).
Ball L.M., “The case for four percent inflation”, Central Bank Review, vol. 13, no. 2, (2013).
Bianchi F., Melosi L., “The dire effects of the lack of monetary and fiscal coordination”, Journal of Monetary Economics, vol. 104 (2019), https://doi.org/10.1016/j.jmoneco.2018.09.001. DOI: https://doi.org/10.1016/j.jmoneco.2018.09.001
Blanchard O.J., Dell’Ariccia G., Mauro P., “Rethinking Macroeconomic Policy”, IMF Staff Position Notes, no. SPN/10/03 (2010), https://doi.org/10.5089/9781455224982.004.A001. DOI: https://doi.org/10.5089/9781455224982.004.A001
Brand C., Bielecki M., Penalver A., “The natural rate of interest: estimates, drivers, and challenges to monetary policy”, ECB Occasional Paper Series, no. 217 (2018).
Burns A.F., Economic research and the Keynesian thinking of our times, New York, NY 1946.
Bystrov V., “Measuring the natural rates of interest in Germany and Italy”, Lodz Economics Working Papers, no. 7/2018 (2018).
Claeys G., “Low long‑term rates: bond bubble or symptom of secular stagnation?”, Bruegel Policy Contribution, no. 2016/15 (2016).
Corsetti G., Dedola L., Jarociński M., Maćkowiak B., Schmidt S., “Macroeconomic stabilization, monetary‑fiscal interactions, and Europe’s monetary union”, European Journal of Political Economy, vol. 57 (2019), https://doi.org/10.1016/j.ejpoleco.2018.07.001. DOI: https://doi.org/10.1016/j.ejpoleco.2018.07.001
Eggertsson G.B., Mehrotra N.R., Robbins J.A., “A model of secular stagnation: theory and quantitative evaluation”, American Economic Journal: Macroeconomics, vol. 11, no. 1 (2019), https://doi.org/10.1257/mac.20170367. DOI: https://doi.org/10.1257/mac.20170367
Eichengreen B., “The Mayekawa Lecture: Wall of worries: reflections on the secular stagnation debate”, Monetary and Economic Studies, vol. 33, no. 1 (2015).
European Central Bank, Fiscal Policies, https://www.ecb.europa.eu/mopo/eaec/fiscal/html/index.en.html.
Fries S., Mésonnier J.S., Mouabbi S., Renne J.P., “National natural rates of interest and the single monetary policy in the euro area”, Journal of Applied Econometrics, vol. 33, no. 6, (2018), https://doi.org/10.1002/jae.2637.
Hamberg D., “Income Growth in Secular Stagnation and Inflation”, The Economic Journal, vol. 63, vol. 251 (1953), https://doi.org/10.1002/jae.2637. DOI: https://doi.org/10.1002/jae.2637
Han F., “Demographics and the natural rate of interest in Japan”, IMF Working Paper, no. WP/19/31 (2019), https://doi.org/10.5089/9781484396230.001. DOI: https://doi.org/10.5089/9781484396230.001
Hansen A.H., “Economic progress and declining population growth”, American Economic Review, vol. 29, no. 1 (1939).
Hansen A.H., Fiscal policy and business cycles, New York, NY 1941.
Higgins B., “The concept of secular stagnation”, American Economic Review, vol. 40, no. 1 (1950).
Holston K., Laubach T., Williams J.C., “Measuring the natural rate of interest: international trends and determinants”, Journal of International Economics, vol. 108, no. S1 (2017), https://doi.org/10.1016/j.jinteco.2017.01.004. DOI: https://doi.org/10.1016/j.jinteco.2017.01.004
International Monetary Fund, World Economic Outlook Database, http://www.imf.org/.
Jarociński M., Maćkowiak B., “Monetary‑fiscal interactions and the euro area’s malaise”, Journal of International Economics, vol. 112 (2018), https://doi.org/10.1016/j.jinteco.2017.12.006. DOI: https://doi.org/10.1016/j.jinteco.2017.12.006
Keirstead B.S., The theory of economic change, Toronto 1948.
Krugman P.R., “It’s baaack: Japan’s slump and the return of the liquidity trap”, Brookings Papers on Economic Activity, vol. 1998, no. 2 (1998), https://doi.org/10.2307/2534694. DOI: https://doi.org/10.2307/2534694
Krugman P.R., End this depression now!, New York, NY 2012.
Krugman P.R., Four observations on secular stagnation, in C. Teulings, R. Baldwin (eds.), Secular stagnation: facts, causes, and cures, London 2014.
Laubach T., Williams J.C., “Measuring the natural rate of interest”, Review of Economics and Statistics, vol. 85, no. 4 (2003), https://doi.org/10.1162/003465303772815934. DOI: https://doi.org/10.1162/003465303772815934
Mankiw G.N., “The reincarnation of Keynesian economics”, NBER Working Paper Series, no. 3885 (1991), https://doi.org/10.3386/w3885. DOI: https://doi.org/10.3386/w3885
Miyagiwa K., Ono Y., “Immigration and secular stagnation”, ISER Discussion Paper, no. 1054 (2019), https://doi.org/10.2139/ssrn.3387136. DOI: https://doi.org/10.2139/ssrn.3387136
Mokyr J., Secular stagnation? Not in your life, in C. Teulings, R. Baldwin (eds.), Secular stagnation: facts, causes, and cures, London 2014.
Niehans J., “Economic growth with two endogenous factors”, The Quarterly Journal of Economics, vol. 77, no. 3 (1963), https://doi.org/10.2307/1879567. DOI: https://doi.org/10.2307/1879567
Okazaki Y., Sudo N., “Natural rate of interest in Japan – Measuring its size and identifying drivers based on a DSGE model”, Bank of Japan Working Paper Series, no. 18E6 (2018).
Organisation for Economic Co‑operation and Development, OECD Data, http://data.oecd.org/.
Organisation for Economic Co‑operation and Development, OECD.Stat, http://stats.oecd.org/.
Rawdanowicz Ł., Bouis R., Inaba K.‑I., Christensen A.K., “Secular stagnation: evidence and implications for economic policy”, OECD Economics Department Working Papers, no. 1169 (2014), https://doi.org/10.1787/5jxvgg6q27vd‑en.
Rothbard M.N., “Breaking out of the Walrasian box: the cases of Schumpeter and Hansen”, The Review of Austrian Economics, vol. 1, no. 1 (1987), https://doi.org/10.1007/BF01539335. DOI: https://doi.org/10.1007/BF01539335
Samuelson P., “Lord Keynes and the General Theory”, Econometrica, vol. 14, no. 3 (1946), https://doi.org/10.2307/1905770. DOI: https://doi.org/10.2307/1905770
Simons H., “Hansen on fiscal policy”, Journal of Political Economy, vol. 50, no. 2 (1942), https://doi.org/10.1086/255852. DOI: https://doi.org/10.1086/255852
Skolimowski P. ECB dispute goes public as governors spar over Draghi’s QE move, Bloomberg, https://www.bloomberg.com/ (2019).
Summers L.H., “US economic prospects: secular stagnation, hysteresis, and the zero lower bound”, Business Economics, vol. 49, no. 2 (2014), https://doi.org/10.1057/be.2014.13. DOI: https://doi.org/10.1057/be.2014.13
Summers L.H., Reflections on the ‘New Secular Stagnation Hypothesis’ in C. Teulings, R. Baldwin (eds.), Secular stagnation: facts, causes, and cures, London 2014.
Summers L.H., Low equilibrium real rates, financial crisis, and secular stagnation, in M.N. Baily J.B. Taylor (eds.), Across the great divide: new perspectives on the financial crisis, Stanford, CA 2014.
Summers L.H., “Demand side secular stagnation”, American Economic Review, vol. 105, no. 5 (2015), https://doi.org/10.1257/aer.p20151103. DOI: https://doi.org/10.1257/aer.p20151103
Summers L.H., “Secular stagnation and macroeconomic policy”, IMF Economic Review, vol. 66, no. 2 (2018), https://doi.org/10.1057/s41308‑018‑0056‑6.
Terborgh G. “Dr. Hansen on ‘The Bogey of Economic Maturity’”, The Review of Economics and Statistics, vol. 28, no. 3 (1946), https://doi.org/10.2307/1926426. DOI: https://doi.org/10.2307/1926426
The World Bank, Data, https://data.worldbank.org/.
Downloads
Published
How to Cite
Issue
Section
License

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.