Wednesday, 20 September 2017

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The great stagnation

April 6, 2015
in Blog

Ben Bernanke, now at Brookings Institute, has a new blog where he has been discussing low interest rates and the problem of secular stagnation. Great stagnation occurs when there are plenty of savings, but not investment options. Therefore, savings are not invested, aggregate demand weakens, and the economy stagnates.

David Beckworth and The Economist offer good summaries and raise interesting points about Bernanke’s claim of a saving glut as the cause of the great stagnation and his exchange with Larry Summers. Beckworth points to the fact that a reduction in risk can explain, at least in part, the decreasing trend in interest rates in the last three decades. This issue is absent in Bernanke’s and Summer’s arguments.

The Economists’s column raises a few interesting points as well. The first point I want to mention is that the problem might not be too much saving, but that savings and investment opportunities are stuck in different places. Because of regulations and country risk, investment capital may not flow to developing countries. This situation, of course, it is not new.

The second point is that if aggregate demand is weak in developed countries, and for a variety of reasons capital flows do not go from developed to developing countries with more investment opportunities, then developed countries should attract resources instead of waiting for capital funds to move– namely, the facilitation of immigration. This is different to Scott Sumner’s suggestion of increasing public investment in infrastructure.

The Economist’s column also brings up a point that is not minor (bold is mine): “Of course, Mr Bernanke allowed, the world could get into trouble if big, fast-growing economies like China decided to save huge amounts of money by buying rich-country debt, in order to depress the value of their currencies and boost their exports. If governments were interfering in the market like that then capital might not flow the right way and secular stagnation might stick around.”

There are two issues here. First, there is too much interaction between large central banks. Is secular stagnation a saving glut problem or a monetary policy problem at the international level? It has, after all, been shown that economies whose central banks deviated further from the Taylor Rule experienced the largest housing bubbles (see here). Second, for fast-growing economies like China to buy rich-country debt, those rich countries need to offer bonds. China was able to follow this policy because of fiscal deficits experienced by rich economies. Is secular stagnation a saving glut problem or a fiscal deficit problem?