“Secular” Stagnation, A Return to Trend

Summary:
On Bank Underground, Gene Kindberg-Hanlon criticizes the secular stagnation hypothesis: Real interest rates have fallen by around 5 percentage points since the 1980s.  Many economists attribute this to “secular” trends such as a structural slowdown in global growth, changing demographics and a fall in the relative price of capital goods which will hold equilibrium rates low for a decade or more (Eggertsson et al., Summers, Rachel and Smith, and IMF).  In this blog post, I argue this explanation is wrong because it’s at odds with pre-1980s experience.  The 1980s were the anomaly … The decline in real rates over the 1990s and early 2000s simply reflected a return to historical norms from an unusually high starting point.  Further falls since 2008 are far more plausibly related to the financial crisis than secular trends.

Topics:
Dirk Niepelt considers the following as important: Financial crisis, Great Recession, Notes, Real interest rate, secular stagnation

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