Secular Stagnation and Macroeconomic Policy

Abstract

Secular stagnation theory has developed substantially recently and offers substantial insights that policymakers have yet to fully internalize. This paper reviews the considerations that led me to revive the secular stagnation idea, summarizes the theory as I understand it today, and argues that events since I started advocating the secular stagnation view have tended to confirm its predictions and reject those of its critics. It addresses the various objections, both theoretical and empirical, that have been put forward to the secular stagnation idea, and argues that if secular stagnation is a central macroeconomic issue, much of the conventional wisdom regarding macroeconomic policy needs to be rethought. Contrary to current orthodoxy, monetary policies may be able to have lasting impacts on levels of output but not to determine rates of inflation. Fiscal policies may be essential for assuring full employment and financial stability. Increases in government indebtedness may contribute to financial stability.

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Fig. 1

Sources: Bureau of Economic Analysis (2016), National Bureau of Economic Research (2016), Census (2016) and CBO (2016)

Fig. 2

Sources: International Monetary Fund (2011–2016), Federal Reserve (2011–2016), Bureau of Economic Analysis (2016)

Fig. 3

Source: Bloomberg

Fig. 4
Fig. 5

Sources: Bloomberg November 2, 2016

Fig. 6

Sources: Bloomberg, International Monetary Fund (2016)

Fig. 7

Sources: Kiley (2015), Laubach and Williams (2015), Curdia (2015) and Hamilton et al. (2016)

Fig. 8

Source: Alichi et al. (2016)

Fig. 9

Source: Gagnon et al. (2014)

Fig. 10

Sources: IMF; State Administration of Foreign Exchange; Haver Analytics. Reproduced from Setser (2016a, b)

Fig. 11

Source: Jordà et al. (2016)

Fig. 12

Source: International Monetary Fund (2016)

Fig. 13

Source: Bloomberg

Fig. 14

Source: Bloomberg

Fig. 15

Source: Robert Shiller (2016)

Fig. 16

Sources: Bloomberg, Congressional Budget Office

Fig. 17

Source: Greenwood et al. (2014)

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Summers, L.H. Secular Stagnation and Macroeconomic Policy. IMF Econ Rev 66, 226–250 (2018). https://doi.org/10.1057/s41308-018-0056-6

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JEL Classification

  • E22
  • E32
  • E60
  • E62
  • E63