scholarly journals A Model of Secular Stagnation: Theory and Quantitative Evaluation

2019 ◽  
Vol 11 (1) ◽  
pp. 1-48 ◽  
Author(s):  
Gauti B. Eggertsson ◽  
Neil R. Mehrotra ◽  
Jacob A. Robbins
Keyword(s):  
Interest Rates ◽  
Elevated Risk ◽  
New Keynesian ◽  
Foreseeable Future ◽  
Cycle Model ◽  
Natural Rate ◽  
Secular Stagnation ◽  
Technological Factors ◽  
Natural Rate Of Interest ◽  
Standard Calibration

This paper formalizes and quantifies the secular stagnation hypothesis, defined as a persistently low or negative natural rate of interest leading to a chronically binding zero lower bound (ZLB). Output-inflation dynamics and policy prescriptions are fundamentally different from those in the standard New Keynesian framework. Using a 56-period quantitative life cycle model, a standard calibration to US data delivers a natural rate ranging from − 1.5 percent to − 2 percent, implying an elevated risk of ZLB episodes for the foreseeable future. We decompose the contribution of demographic and technological factors to the decline in interest rates since 1970 and quantify changes required to restore higher rates. (JEL E12, E23, E31, E32, E43, E52)

scholarly journals Monetary Policy Frameworks and the Effective Lower Bound on Interest Rates

2019 ◽  
Vol 109 ◽  
pp. 427-432 ◽  
Author(s):  
Thomas M. Mertens ◽  
John C. Williams
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
Interest Rates ◽  
Inflation Targeting ◽  
New Keynesian ◽  
Inflation Expectations ◽  
Natural Rate ◽  
Keynesian Model ◽  
Natural Rate Of Interest ◽  
Downward Bias

This paper applies a New Keynesian model to analyze monetary policy in the presence of a low natural rate of interest and a lower bound on interest rates. Under standard inflation-targeting, inflation expectations will be anchored at a level below the inflation target. Two themes emerge from our analysis: first, the central bank can mitigate this problem of a downward bias in inflation expectations by following an average-inflation targeting framework. Second, price-level targeting that raises inflation expectations when inflation is low can both anchor expectations at target and further reduce the effects of the lower bound on the economy.

Natural Interest Rate: Sraffa Vs. Hayek Debates

2019 ◽  
Vol 2019 (3) ◽  
pp. 3-16
Author(s):  
Aleksandr Kovalev
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Economic Thought ◽  
Business Cycle Theory ◽  
Natural Rate ◽  
Main Method ◽  
Natural Rate Of Interest ◽  
History Of ◽  
The Impact

This article deal with the discussion between F. Hayek and P. Sraffa in the 1930s. This piece of the history of economic thought is not presented in the Russian-speaking literature. The main method is a content analysis. The directions of criticism Hayek’s business cycle theory by Sraffa and the response towards is analyzed in the paper. The author compared the opponents’ approaches to the essence of the equilibrium, to the savings-investments equality, to the possibility to lose capital as a result of malinvestments, to the role of expectations, and to the natural rate of interest. A version was offered for explaining the ineffectiveness of Hayek's answer to the question on the multiplicity of natural interest rates and the reasons why the barter economy has been perceived as theoretical basis of the Hayekian analysis. It is the inaccurate wording of the natural interest rate and the representation the theory within the framework of the equilibrium paradigm. The findings of the research may be applied to analyze the impact of interest rate regulation on the economic.

scholarly journals Dynamic Debt Deleveraging and Optimal Monetary Policy

2020 ◽  
Vol 12 (2) ◽  
pp. 310-350 ◽  
Author(s):  
Pierpaolo Benigno ◽  
Gauti B. Eggertsson ◽  
Federica Romei
Keyword(s):  
Monetary Policy ◽  
Lower Bound ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Optimal Monetary Policy ◽  
Natural Rate ◽  
Keynesian Model ◽  
Natural Rate Of Interest ◽  
Standard Framework

This paper proposes a postcrisis New Keynesian model that incorporates agent heterogeneity in borrowing and lending with a minimum set of assumptions. Unlike the standard framework, this model makes the natural rate of interest endogenous and dependent on macroeconomic policy. The main application is to study optimal monetary policy at the zero lower bound (ZLB). Such policy succeeds in raising the natural rate of interest by creating an environment that speeds up deleveraging and thus endogenously shortens the crisis and the duration of binding ZLB. Inflation should be front-loaded and should overshoot its long-term target during the ZLB episode. (JEL E12, E31, E32, E43, E52)

scholarly journals The Secular Stagnation Hypothes is and the Future of Europe’s Advanced Economies

Politeja ◽  
2020 ◽  
Vol 17 (3(66)) ◽  
pp. 53-66
Author(s):  
Artur F. Tomeczek
Keyword(s):  
World War Ii ◽  
Western Europe ◽  
Short Review ◽  
Economic Research ◽  
Natural Rate ◽  
Secular Stagnation ◽  
The Great Depression ◽  
Advanced Economies ◽  
The Future ◽  
Natural Rate Of Interest

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.

scholarly journals The Side Effects of Safe Asset Creation

2021 ◽  
Author(s):  
Sushant Acharya ◽  
Keshav Dogra
Keyword(s):  
Side Effects ◽  
Interest Rates ◽  
Incomplete Markets ◽  
Full Employment ◽  
Government Debt ◽  
Costs And Benefits ◽  
Natural Rate ◽  
Natural Rate Of Interest ◽  
Inflation Targets ◽  
Asset Creation

Abstract We present an incomplete markets model to understand the costs and benefits of increasing government debt when an increased demand for safety pushes the natural rate of interest below zero. A higher demand for safe assets causes the ZLB to bind, increasing unemployment. Higher government debt satiates the demand for safe assets, raising the natural rate, and restoring full employment. However, this entails permanently lower investment, which reduces welfare, since our economy is dynamically efficient even when the natural rate is negative. Despite this, increasing debt until the ZLB no longer binds raises welfare when alternative instruments are unavailable. Higher inflation targets instead allow for negative real interest rates and achieve full employment without reducing investment.

The Limits of a Negative Interest Rate Policy (NIRP)

2018 ◽  
Vol 51 (4) ◽  
pp. 561-585
Author(s):  
Gerhard Illing
Keyword(s):  
Lower Bound ◽  
Financial Stability ◽  
Natural Extension ◽  
Jel Classification ◽  
New Keynesian ◽  
Real Economy ◽  
Natural Rate ◽  
Interest Rate Policy ◽  
Forward Guidance ◽  
Natural Rate Of Interest

Abstract The paper analyzes the experience with unconventional measures to cope with the Zero Lower Bound. It argues that forward guidance and quantitative easing are the natural extension of optimal monetary policy within the New Keynesian Framework, facing a Lower Bound. Unconventional policy had significant effects on financial variables and contributed to stabilizing the real economy. Negative rates have been successful in pushing the effective lower bound below zero. But given the risk of damaging side effects on financial stability and on central bank independence, these policy tools are likely to be less powerful and shorter-lived compared to standard tools. In view of the long-term decline of the natural rate of interest, raising the inflation target up to 3–4 percent appears to be the most promising way to relax the constraint imposed by the lower bound, providing a resilient buffer for effective stabilization. Zusammenfassung Die Arbeit untersucht die Auswirkungen unkonventioneller Geldpolitik. Sie zeigt, dass Forward Guidance und Quantitative Lockerung als Anwendung optimaler Geldpolitik im Rahmen Neu-Keynesianischer Modelle angesichts einer effektiven Zinsuntergrenze zu verstehen sind. Unkonventionelle Geldpolitik hat erfolgreich zur Stabilisierung von Finanzmärkten und Realwirtschaft beigetragen. Auch wenn sich die Zinsuntergrenze in gewissem Rahmen unter null senken lässt, ist die Wirkung unkonventioneller Maßnahmen – im Vergleich zu Standard-Instrumenten – jedoch kurzlebiger und weniger schlagkräftig, unter Berücksichtigung der Risiken für Finanzmarktstabilität und Zentralbankunabhängigkeit. Angesichts des nachhaltigen Rückgangs des “natürlichen” Realzinses erscheint eine Abhebung des Inflationsziels auf 2–4 % der geeignetste Weg, um einen robusten Mechanismus effektiver Stabilisierung zu erreichen. JEL Classification: E43, E52, E58

scholarly journals A Lower Bound on Real Interest Rates

2016 ◽  
Author(s):  
Jesse Aaron Zinn
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Fisher Equation ◽  
Real Interest Rates ◽  
Natural Rate ◽  
Recent Commentary ◽  
Erroneous Belief ◽  
Natural Rate Of Interest

I show that real interest rates can be no lower than -100%. This contrasts with recent commentary suggesting that there is no lower bound on the natural rate of interest. I discuss how using the textbook approximation to the Fisher equation can lead to the erroneous belief that there is no lower bound on real interest rates, so this analysis serves as a reminder to avoid using this approximation when considering the effects of extreme levels of inflation.<mailto:[email protected]><mailto:[email protected]>

scholarly journals Interest Rates, Roundaboutness, and Business Cycles: An Empirical Study

2019 ◽  
Vol 22 (3) ◽  
pp. 311-335
Author(s):  
Mark Gertsen
Keyword(s):  
Interest Rates ◽  
Early Stage ◽  
Natural Rate ◽  
Developed Economies ◽  
Distributed Lag ◽  
Distributed Lag Model ◽  
Autoregressive Distributed Lag ◽  
Show Evidence ◽  
Natural Rate Of Interest ◽  
Lag Model

I show evidence of Austrian boom-bust dynamics in historical data on the production structure of 28 developed economies. I employ an autoregressive distributed lag model to find that policy-induced deviations from the natural rate of interest increases roundaboutness. This could instigate an unsustainable boom. Additionally, I find that early-stage industries have higher cyclical sensitivity than late-stage industries, consistent with Austrian time-value dynamics in the structure of production.

scholarly journals The fallacy of the natural rate of interest and zero lower bound economics: why negative interest rates may not remedy Keynesian unemployment

2019 ◽  
Vol 7 (2) ◽  
pp. 151-170 ◽  
Author(s):  
Thomas I. Palley
Keyword(s):  
Lower Bound ◽  
Interest Rates ◽  
Market Imperfections ◽  
Zero Lower Bound ◽  
Natural Rate ◽  
Keynesian Economics ◽  
Negative Interest Rates ◽  
Nominal Interest Rates ◽  
Natural Rate Of Interest ◽  
Keynesian Unemployment

This paper provides a critique of zero lower bound (ZLB) economics which has become the new orthodoxy for explaining stagnation. ZLB economics is an extension of pre-Keynesian economics which attributes macroeconomic dysfunction to rigidities and market imperfections. The ZLB is the latest rigidity in that pre-Keynesian tradition. The paper argues negative nominal interest rates, even if feasible, may be unable to remedy Keynesian demand shortage unemployment, and might even aggravate the problem. That is because there exist non-reproduced assets whose return dominates that of investment, and saving may also increase in response to negative rates. Consequently, there may be no natural rate of interest.

scholarly journals The Case against the New "Secular Stagnation Hypothesis"

2021 ◽  
Vol 24 (2) ◽  
pp. 219-253
Author(s):  
Mihai Macovei
Keyword(s):  
Interest Rate ◽  
Financial Crisis ◽  
Global Financial Crisis ◽  
Explanatory Power ◽  
Bank Loan ◽  
Rate Theory ◽  
Natural Rate ◽  
Secular Stagnation ◽  
Natural Rate Of Interest ◽  
The Global Financial Crisis

The new “secular stagnation hypothesis” developed by Lawrence H. Summers attempts to justify why the demand stimulus applied in the aftermath of the global financial crisis failed to revive growth in a satisfactory manner. Building on previous ideas of Keynes, Hansen, and Bernanke, Summers claims that excess savings together with feeble investment drove the natural rate of interest down to zero and advanced economies into stagnation. As the US monetary policy rate is not allowed to fall below the zero bound, Summers calls for “quantitative easing” and more expansionary fiscal policy to spur investment demand. This paper refutes Summers’s hypothesis by revealing its internal inconsistencies and presenting both theoretical arguments and empirical evidence on the long-term evolution of savings, investment, productivity, and capital stock. It also estimates the natural rate of interest following the approach of Salerno (2020), which is further refined based on Rothbard’s “pure interest rate” theory. The calculation shows that the natural interest rate did not drop to zero after the global financial crisis, but has actually remained consistently and significantly above the federal funds rate and the bank loan prime rate. This not only invalidates Summers’s central claim, but confirms once more the explanatory power of the Austrian business cycle theory in relation to the main trigger of the global financial crisis and its subsequent unfinished recovery.

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