Secular Stagnation

Friday, October 3, 2014

Question 1: Do you agree- making your own definition of secular stagnation clear if you disagree with that offered here- that it is more likely than not that the advanced Western economies have entered into a period of secular stagnation?

Question 2: Do you think that current structural and fiscal policies should place a considerably greater emphasis on pushing the natural rate into positive territory?

Summary:

This month’s questions concern the revival of interest in the idea of secular stagnation. The survey was conducted in the last week of September. A full list of written responses from our panel of experts can be found here. Only 24% (27% if we weigh by confidence) of respondents think that the Western economies have entered a period of secular stagnation. Indeed, several panel members question whether secular stagnation is a useful and well-defined concept and this may explain the lack of strong views on either side.

Despite some ambivalence to the idea of secular stagnation, the number of respondents who think that policies should be more concerned about low real interest rates is substantially higher than the number that do not.

The idea of secular stagnation

Over seven years since the collapse of the interbank market and nearly six years after the collapse of Lehman Brothers, the global financial crisis is still with us and the recovery does not quite seem secure. Despite years of extraordinarily low policy interest rates, increases in public debt and unconventional monetary policies, few advanced economies have secured the kind of growth that characterised the post-war growth experience. Larry Summers (2013) has suggested that the lack of response to these policy stimuli might imply that a secular stagflation may have taken hold.[1]

For this month’s CFM survey, we provided a simple outline of what we think the hypothesis entails and then first asked respondents to consider whether they thought the major advanced economies (the US, the UK and the euro area) have recently entered a phase of secular stagnation.[2] We then asked respondents to give an opinion on whether the natural rate of interest is currently negative and thus whether further policy stimulus is required.

The exact definition of secular stagnation is not entirely clear. Alvin Hansen coined the term in his presidential address to the American Economic Association in 1938 to describe a prolonged period of low growth and high unemployment, with no self-correcting mechanism to return the economy to full employment and rapid growth. And the latter-day symptoms would seem to involve sluggish economic growth, as well as large output gaps and below target rates of inflation following the economic crisis. The poor performance of the real side of the economy has left economies vulnerable to further problems induced by persistently low, and possibly falling, real rates of return that have distorted financial balance sheets and left the financial sector prone to asset price bubbles.

In their recent collection of papers, Coen Teulings and Richard Baldwin (2014) suggested three implications of secular stagnation:[3]

Secular stagnation implies that negative real rates are required to bring savings and investment to clear at full employment.
The appearance of secular stagnation makes it especially hard to achieve full employment when there is both low inflation and a binding zero lower bound on policy rates.
An immediate need for economists and policy-makers to start dealing with secular stagnation by adopting more expansionary policies.

Q1: Do you agree – making your own definition of secular stagnation clear if you disagree with that offered here – that it is more likely than not that the advanced Western economies have entered into a period of secular stagnation?

Summary of responses

Respondents tend to agree with the observable fact that real rates have trended down but the consensus among the respondents mostly breaks down at that point. Many, for instance, do not like the basic concept of secular stagnation. Morten Ravn (UCL), for example, says ‘I prefer to refer to secular stagnation simply as a very long recession’; and Patrick Minford (Cardiff) goes further: ‘The definition is confused. It is either stating that there is a ‘demand problem’ (such as a failure of the monetary and credit system) or that there is a ‘productivity/supply problem’ (such as distortions in the labour market, lack of competitive entry into industry, regulative obstacles).’ And some, such as Angus Armstrong (NIESR) place other reasons than secular stagnation as an explanation: ‘I suspect that private balance sheets and the unreconstructed financial sector are central to the stagnation.’

The complexity of the issues under consideration is outlined by Luis Garicano (LSE): ‘There are also clear demographic headwinds that will continue to reduce employment rates. The demographic component is undeniably secular, the TFP part may or may not be, depending on future technological gains. Thus I agree there are substantial reasons to think that the capacity of the economy to grow is likely lower than in the past, and this is likely to be persistent. I do not agree however we are in a phase of demand-side secular stagnation in the sense of permanent below potential growth.’

The natural rate of interest

One key aspect of the secular stagnation hypothesis is that the natural rate of interest, which equates savings and investment at full employment, may have become negative. The long-run decline in real rates has been variously explained by the growth of emerging economies that run large external surpluses, which add to the pool of global savings, as well as a collapse in the demand for loanable funds by the fast-growing IT sector, the effects of population ageing and increasing demand for safe assets.

It is hard for some economists to accept that natural rates are negative as that implies a negative rate of time preference in a representative agent model,[4] as well as a lack of positive investment opportunities. But if the natural rate is negative then expansionary policies – whether structural or fiscal – may help push the natural rate back into the territory that can be managed by orthodox monetary policies.

Q2: Do you think that current structural and fiscal policies should place a considerably greater emphasis on pushing the natural rate into positive territory?

Summary of responses

Some respondents feel that there ought to be more expansionary policy whether or not there is a secular stagnation. Simon Wren-Lewis (Oxford) writes ‘An unusual degree of fiscal contraction has caused a slow recovery in the US, a delayed recovery in the UK, and a second recession in the Eurozone. This is all unnecessary and damaging, and so should be reversed, whether we have secular stagnation or not.’ But even some of those who agree remain cautious – Costas Milas (Liverpool), for example, says ‘I agree with reference to structural policies. We need to be cautious in terms of how expansionary fiscal policy needs to be as this should be conditional on whether the budget deficit-to-GDP ratio and/or the debt-to-GDP ratio is sufficiently low.’

In a similar vein but with disagreement in mind, Jagjit Chadha (Kent) says ‘there is probably always room for more structural reform but it should not target a particular rate of return. Fiscal policy may have some role to play in infrastructure investment but in many countries, with the exception of Germany, there is not much room for manoeuvre.’ And Marco Bassetto (UCL) outlines another argument: ‘I believe that the very low real interest rates that we are experiencing follow from disruptions in financial markets. The best way for the government to help is to provide a clear and transparent regulatory environment, stable rules of the game, and to ensure that its own credibility as a debtor is sustained. Running big deficits is incompatible with this credibility.’

Furthermore, Silvana Tenreyro (LSE) argues ‘The natural rate of interest per se should not be a target for structural or fiscal policy (for one, it is difficult to measure!); unemployment and other labour market variables – among others – are more informative and relevant indicators to guide policy actions.’

References

Hansen, Alvin (1938), Speech published as A H Hansen (1939), “Economic Progress and Declining Population Growth”, American Economic Review, 29: 1–15.

Summers, Larry (2013) ‘Why stagnation may prove to be the new normal’ (http://larrysummers.com/commentary/financial-times-columns/why-stagnation-might-prove-to-be-the-new-normal/)

Teulings, Coen and Richard Baldwin (2014) ‘Secular stagnation: Facts, causes, and cures’ (www.voxeu.org/sites/default/files/Vox_secular_stagnation.pdf).

Notes

1. Even Summers may have had second thoughts: http://www.ft.com/cms/s/2/4be87390-352a-11e4-aa47-00144feabdc0.html#axzz3E8EyT1Xb.

2. Japan may be considered a precursor but we suggest concentrating on Western economics in this analysis.

3. See www.voxeu.org/sites/default/files/Vox_secular_stagnation.pdf .

4. See Simon Wren-Lewis for an explanation of how this observation may change in an overlapping generations framework: http://mainlymacro.blogspot.co.uk/2014/04/secular-stagnation-and-three-period-olg.html.

How the experts responded

Do Western economies suffer from secular stagnation

Participant	Answer	Confidence level	Comment
Giancarlo Corsetti University of Cambridge	Neither agree nor disagree	Not confident	The world has started to experience persistently low long-term real interest rates already many years ago. These rates appear to be quite insensitive to short-run cyclical conditions. At that time leading explanations pointed to a global saving glut. The argument often motivated rethinking monetary and fiscal policy (for instance, a higher inflation target as a way to reduce the likelihood of the zero lower bound). After 2008 we have redefined the problem. Still a verdict would require a deeper understanding of global determinants of 'secular stagnation', including differences in demographic, health, welfare states and social security systems, and stages of industrialization (lacking a better label).
Angus Armstrong Rebuilding Macroeconomics, IGP, UCL	Disagree	Confident	There is more than one explanation for the configuration of slow growth, negative real rates and below target inflation. I suspect that private balance sheets and the unreconstructed financial sector are central to the stagnation. Is this within the 'secular stagnation' story? Since I don't agree that rising public debt and QE are obviously stimulative policies, then my interpretation is supply side / headwinds.
Luis Garicano London School of Economics	Agree	Confident	It seems undeniable that there is a substantial and simultaneous long run slowdown in labor productivity growth and in TFP growth across all advanced economies-- Japan, Euro Area, USA; UK. Recent work by Fernald (2014) concerning the US shows that the current phase of this slowdown (after a brief 1995-205 acceleration) predates the financial crisis and that it is related to the slowdown in IT related gains. There are also clear demographic "headwinds" that will continue to reduce employment rates. The demographic component is undeniably secular, the TFP part may or may not be, depending on future technological gains. Thus I agree there are substantial reasons to think that the capacity of the economy to grow is likely lower than in the past, and this is likely to be persistent. I do not agree however we are in a phase of "demand-side" secular stagnation in the sense of permanent below potential growth.
Wouter Den Haan London School of Economics	Neither agree nor disagree	Not confident	Real interest rates have been low for quite a while. I am not sure, however, whether the situation is so bad that most advanced Western economies, including the UK and the US, are in such poor shape that full employment requires negative real interest rates. After all, the UK and US unemployment rates are not that high anymore.
John Driffill Birkbeck College, University of London	Disagree	Not confident	The rate of growth of real GDP per head with full employment -- employment at the natural rate or non-accelerating-inflation rate or equilbirum unemployment -- depends largely on technical progress, new innovations coming along that will raise productive potential. These may or may not slow down in the coming years. They may speed up. Who knows? Keeping economies at full employment is another matter. The new innnovations may or may not need a lot of investment in new capital equipment, demand for which will stimulate spending and keep economies at full employment without needing negavie real interest rates and/or lots of debt- or money-financed government spending. Stagnant or falling populations of long-lived people saving for a long work-free old age may produce more saving than an economy can absord at positive real interest rates without a lot of public sector borrowing.
Richard Portes London Business School and CEPR	Agree	Very confident	What is the evidence? Real policy (short-term) interest rates are negative in all major advanced economies - all nominal at (or even below) ZLB. Even real 10-year rates are around zero or below, deflating by expected inflation rates. And yet all of these economies are below full employment, showing substantial output gaps. This is pretty strong evidence that the Wicksellian natural rate is currently well below zero. But is this a long-term phenomenon ('secular')? Not obvious. The claim that real rates have been 'historically low' from the beginning of the 2000s is false - there were significant periods of negative real rates in the 1960s and 1970s in the US and UK. But there are some arguments underlying secular stagnation mentioned in question 2 that I find fairly strong.
Gianluca Benigno London School of Economics	Agree	Confident	In my opinion one of the other features of secular stagnation is low productivity growth that also lead to sluggish economic growth. This is also related to the idea that cyclical stagnation, a large negative output gap, can reduce the level of potential output if it is persistent through a reduction in business and capital investment. So even when the output closes, potential and actual output would be lower than the level that they would have been if the initial output gap would have been closed promptly. Since measuring potential growth is not an easy task, it is hard to assess the extent to which secular stagnation is present. Current measure of slack in the economy (like the unemployment rate) would suggest that the euro area and Japan are experiencing or have been experiencing secular stagnation. For the US economy and the UK economy it is harder to tell as (a non fast) recovery is under way with mixed symptoms in terms of what could be interpreted as a period of stagnation.
David Cobham Heriot Watt University	Agree	Not confident
Marco Bassetto University College London	Neither agree nor disagree	Not confident	There seems to be a lot of heterogeneity across different Western economies. For those that have indeed been stagnating for a long period of time, such as Italy, the causes do not seem to be related with equilibrium interest rates, but rather the lack of structural reforms, and poor R&D investment that put them in a weak position in the face of increasing competition from East Asian countries.
Martin Ellison University of Oxford	Agree	Confident
Jonathan Portes KIng's College, London	Disagree	Not confident at all	I do not think we have a clear enough definition of "secular stagnation" to say with any confidence that we in such a period. Moreover, the major Western economies are in very different positions - the US has seen growth, although income and wealth inequalities are at historically very high levels and employment has been weak; meanwhile, the UK has seen strong employment growth alongside very weak productivity; and the eurozone is on the verge of deflation. It is not clear how a vague concept like "secular stagnation" can be applied to such very different economic environments.
Jagjit Chadha National Institute of Economic and Social Research	Disagree	Very confident	We are still unpicking the impact of an extended economic expansion and the subsequent financial crash. Clearing debt burdens and engineering a new monetary-fiscal-financial policy nexus may have a sustained impact on economic growth but do not a secular stagnation make.
David Smith Sunday Times	Disagree	Very confident	There is an argument for secular stagnation in parts of the eurozone and Japan - even after Abenomics - , but not more generally.
Fabien Postel-Vinay University College London	Disagree	Confident
Michael McMahon University of Oxford	Agree	Confident	If defined by a period of negative real interest rates and low growth, then I do believe that the major Western economies are likely to enter a period of secular stagnation. The part that I am uncertain about is the extent to which secular stagnation requires the cause to be weak demand and the extent to which what we are seeing now is purely a demand driven story. The current weakness of the economy likely gives rise to a negative output gap, but I doubt that output gap is that large - certainly much lower than the output gap implied by extrapolating pre-crisis trends. I think it is quite likely that not only has the level of potential GDP fallen, but so too has potential GDP growth. And that trend growth may remain subdued for the coming years.
Paul De Grauwe London School of Economics	Neither agree nor disagree	Not confident
Paolo Surico London Business School	Neither agree nor disagree	Not confident
Nicholas Oulton London School of Economics	Disagree	Confident	The term “secular stagnation” is used for two quite different hypotheses: (1) the natural rate of interest needs to be negative to secure full employment or (2) long term growth in advanced economies will be slower due to various “headwinds”. I am not convinced by either. First, in both the US and the UK the unemployment rate is only a bit above its equilibrium level and still falling, without the need for negative real rates (as actually paid by typical borrowers). Second, the cited headwinds, such as declining educational attainments, apply to the US but not to the UK. And personally I am optimistic about the future rate of technical progress, including a large and continuing contribution from ICT. Having said that, my own research suggests that the advanced countries have suffered a permanent hit to GDP per head due to the financial crisis of the order of 5%. So though growth will resume it will be from a lower base than prior to the crisis. On top of that there are the continuing problems in the Eurozone but these are due to the way that monetary union has operated in practice --- principally Germany's refusal to guarantee the debts of the countries in trouble, not to secular stagnation.
Andrew Mountford Royal Holloway	Neither agree nor disagree	Extremely confident	Again the phrasing of the question makes the results histogram meaningless. Nevertheless, to answer the question, as the preamble suggests the issue of secular stagnation seems a bit confused and ill-defined. One doesn't need new concept to understand why equilibrium growth levels may be falling. We have known for some time that an unequal income distribution can negatively affect long run growth ( see e.g. Galor and Zeira (1993)) . The recent empirical work of Piketty and the World Top Incomes database team http://topincomes.g-mond.parisschoolofeconomics.eu/ shows that the income distribution has been becoming significantly more unequal recently. If you want a demand side story then again you need look no further than income redistribution for an answer. According to AgeUK almost 25% of pensioners are in or on the brink of poverty. ( http://www.ageuk.org.uk/money-matters/income-and-tax/living-on-a-low-income-in-later-life/ ) If you want to raise demand then permanently increasing taxes on the wealthy (e.g. land) to redistribute permanently to this group would definitely raise demand. Their MPC would be near 1.
Sir Christopher... London School of Economics	Disagree	Extremely confident	The United States is recovering well from the recession and it will experience above trend growth. This alone says that the western economies have not entered stagnation because the major economy is growing again. I agree that in stagnation the real interest rate needs to be negative - or some other incentive needs to stimulate investment. The US Federal Reserve has made sure that this has not happened. The UK is also not entering stagnation. Although its recovery was rather slow because of too much fiscal restraint in the depths of recession it is again recovering. But I am concerned about the Eurozone and the German insistence that one size (the German one) fits all. This might cause prolonged stagnation in the area as a whole, as prices are not allowed to rise to the ECB targets
George Buckley Deutsche Bank	Disagree	Not confident	There are two competing theories why developed markets have failed to recover quickly/at all from the credit crisis. First, secular stagnation - which is essentially that demand cannot be stimulated enough with policy given that policy is at a lower bound and equilibrium interest rates are well below zero. Second, there is Gordon's argument that it could be supply driven - innovation rates might have fallen or at the very least innovations now are adding less to economic growth/productivity now than they did in the past. It is far too early to tell which of these is correct and how persistent it will be. But there is clearly a non-negligible risk of one of these being right. It could, alternatively, be the Reinhart & Rogoff argument that recoveries following financial crises tend to be weaker. If that were correct then we would eventually see economies recover more quickly as the crisis fades into the distance.
Michael Wickens Cardiff Business School & University of York	Disagree	Confident	The US and the UK are growing again and so aren't stagnating. Eurozone countries are stagnating due to the constraints imposed by being in a currency union.
Morten Ravn University College London	Agree	Very confident	I prefer to refer to secular stagnation simply as a very long recession. By that token, many advanced economies find themselves in a secular stagnation. There ARE exceptions, though: Countries such as Germany and Sweden are back on their pre-2007 trends (and employment has even risen in Germany relative to 2007). Economies such as US and the UK are recovering but are still well below the levels of activity that would have predicted by their pre-crisis trends. Even worse, countries such as Greece, Italy and Spain are witnessing falling levels of activity and have essentially lost 10-15 years of growth. But if you look at other indicators included in the definition above, the picture is very mixed. The level of unemployment is still rising in Southern Europe but is declining in the US. Real interest rates are quite different across countries and demand seem to recovering in some economies but not in others. I think what is missing is that the incentive to save (and invest) depend not only on real interest rates but also on perceived risk which induces precautionary savings thereby depressing consumption and to positive option values of delaying investment projects. Risk, for example, may still be perceived to be high in the US because the duration of unemployment has remained high despite the level of unemployment declining. Thus, I agree to the extent that the definition refers to a long and severe recession while the other parts of the definition are questionable.
Silvana Tenreyro London School of Economics	Neither agree nor disagree	Confident	I agree we are currently in a period of stagnation; I am not convinced it is 'secular'---understood as persisting for a very long period. Some of the trends that arguably drove this stagnation including the decline in the price of investment (Thwaites, 2013), or high savings rates in Asia, may revert as productivity growth in the investment sector slows down and/or emerging economies' growing middle classes decide to consume more, pushing up demand in Western economies.
Patrick Minford Cardiff Business School	Neither agree nor disagree	Confident	The definition is confused. It is either stating that there is a 'demand problem' (such as a failure of the monetary and credit system) or that there is a 'productivity/supply problem' (such as distortions in the labour market, lack of competitive entry into industry, regulative obstacles). On the facts of growth it is clear that in all western economies the 'trend level' has dropped; understanding why remains elusive but it looks like some key industries (especially banking but also matreial-intensive ones) have been hit hard by a long-lasting shock(s). As for recovery to, and growth at, a new lower trend level the UK and the US, as well as many other advanced economies outside the euro-zone and Japan, seem to be on a similar track to the past. the post-crisis recovery may have taken longe but it is now proceeding. So for these economies 'secular stagnation' does not fit- even if as always there are particular supply-side weaknesses Japan and the euro-zone are another matter. In Japan it has been found impossible to have 'structural transformation' to a service-based economy; lack of competition and regulative excess is endemic and there is political stalemate. The Abe two arrows on demand are powerful but the thrid arrow- on supply has fallen to the ground. Thus Japan counts as secularly stgnant for 'suppy reasons'. The euro-zone is also secularly stagnant. Here there are twin reasons. On the demand side the euro straitjacket plus the new bank regulative structure have caused problems for bank credit and general confidence. On the supply side hoped-for 'reforms' (such as in Italy) are slow to appear because with demand so weak and unemployment so high there is huge political opposition from losers. Looking back, it is clear that creating the euro was a strategic mistake from which the euro-zone may not recover.
Alan Sutherland University of St. Andrews	Agree	Not confident
Tony Yates University of Birmingham	Neither agree nor disagree	Confident	I take secular stagnation to be, well, secular, ie relating to i) demographics, ii) some change in the rate of technical progress. I think the evidence is moot. For sure we have had a prolonged period where policies of maximal stimulus have struggled to generate a recovery, and keep inflation on track. But one could just as well account for this by the debt overhang created by the pre-crisis 'irrational exuberance', and the uncertainties injected by markets pondering how macroeconomic and regulatory policy will work out in the future. It's too early to tell, therefore!
Costas Milas University of Liverpool	Disagree	Confident	I do not see convincing evidence of permanently low growth (secular stagnation); the UK economy, which has bounced back strongly, is a good example. If secular stagnation was an issue then one would arguably expect the admittedly low GDP growth recorded over the past few years to weigh heavily on subsequent growth. To test this, I run a small “experiment”. Using UK data over the last 150 years and controlling for the effects of (a) global financial crises (using the financial crisis indicator from the “correct” spreadsheet of Profs Reinhart and Rogoff), (b) a long UK real interest rate and (c) the UK debt/GDP, I found (via impulse response analysis) that whether the UK economy grows above or below an endogenously estimated “trend rate” of 2.2%, past GDP growth weighs in a similar manner (in terms of impact and duration) on subsequent GDP growth. Loosely speaking, growth persistence is very similar whether we are in a low or high growth regime which (I feel) rejects secular stagnation.
Ethan Ilzetzki London School of Economics	Disagree	Not confident at all	I would attribute low real interest rates to the supply of savings coming from a large middle-age cohort in the US, Japan, China, and some European economies. As these populations enter retirement, they will begin to dis-save, thus putting upward pressures on real interest rates.
Francesco Caselli London School of Economics	Disagree	Confident
John VanReenen London School of Economics	Disagree	Confident	There is no need for Western economies (or Japan) to have fallen to a lower growth path. I agree that we need a more expansionary monetary and fiscal policy in the Eurozone and desired interest rates are negative. The reason we do not have more expansionary policies is political and ideological. It could be changed if policy makers behaved differently. I do not agree with the idea that the underlying rate of productivity growth has slowed - or if it has there is no clear evidence of this contra Gordon.
Simon Wren-Lewis University of Oxford	Disagree	Not confident	The empirical evidence that there has been a fall in the 'natural' real interest rate since the 1980s is pretty clear. Whether it has fallen to some negative number is much less clear. Our current problems with nominal rates staying at the zero lower bound may reflect a small but positive natural real rate coupled with a degree of fiscal contraction that is quite unusual during the recovery stage of a recession. I've also found the theoretical explanations so far offered unconvincing.
Tim Besley London School of Economics	Disagree	Confident

Should government policies aim at increasing the natural interest rate?

Participant	Answer	Confidence level	Comment
Giancarlo Corsetti University of Cambridge	Agree	Confident	The key question however concerns the mix of instruments and strategies. In countries with a high vulnerability to sovereign risk crises, the combination of structural and cyclical policies may be difficult to achieve, in a regime of low credibility. For the euro area, the system-wide common policy strategy and the level of cooperation may vastly outweigh domestic initiatives.
Angus Armstrong Rebuilding Macroeconomics, IGP, UCL	Strongly Agree	Confident	Positive real rates would be part of a return to steady state. Greater emphasis on how to achieve this through more active structural policy would be welcome. To be specific, such structural policies would include deeper financial reform and reducing tax breaks for leverage (including sensible housing taxation).
Wouter Den Haan London School of Economics	Agree	Not confident	In all advanced Western economies there is a lot of scope for structural policies that will increase the productivity of investment. In particular, I am thinking of implementing transparent and effective financial market regulation (what is currently done is far from transparent). Moreover, several Euro area countries still have a lot of room to increase the flexibility of labour markets. Whether we should pursue expansionary fiscal policies is not clear to me. I am not sure whether politicians will be able to do this effectively. I do think, however, that the current policy of doing more austerity whenever the economy does unexpectedly worse doesn't make sense and could potentially very damaging.
John Driffill Birkbeck College, University of London	Disagree	Confident	If maintaining anything near full employment with roughly balanced public sector budgets and with inflation at the levels of current targets becomes impossible, then there may be a case for setting higher inflation targets so there is more room for negative real interest rates. At the same time very low or negative real interest rates provide a strong case for more public borrowing to finance more and better public capital and infrastructure, and even, if necessary, some current spending financed by borrowing or printing money.
Richard Portes London Business School and CEPR	Strongly Agree	Very confident	Although there is no evidence of a 'long run decline in real rates' (see answer to Q1), even the US and UK would benefit from policies that would raise the natural rate, a fortiori the euro area and Japan. But they would also benefit from a move to higher inflation targets, which could bring down real market rates and give some room for monetary policy. Alas, this will not happen.
Gianluca Benigno London School of Economics	Agree	Confident	Based on my comments in the previous question prompt policy intervention is important to avoid a cyclical downturn to become permanent. Fiscal stimulus that might take different forms at national levels financed via monetary expansion could be needed
David Cobham Heriot Watt University	Agree	Confident
Marco Bassetto University College London	Disagree	Very confident	I believe that the very low real interest rates that we are experiencing follow from disruptions in financial markets. As an example, the scandals that we witnessed may have breached the public's trust in financial intermediaries, and this may have damaged the process of financial intermediation. I see very little evidence of explanations based on a large willingness to save. Once government (negative) saving is taken into account (as it should), saving has gone down since the crisis in the developed world, and I do not see such massive inflows from the developing economies that would make up for the drop. The best way for the government to help is to provide a clear and transparent regulatory environment, stable rules of the game, and to ensure that its own credibility as a debtor is sustained. Running big deficits is incompatible with this credibility.
Martin Ellison University of Oxford	Agree	Confident
Jonathan Portes KIng's College, London	Agree	Not confident	In the eurozone, absolutely; regardless of precisely what "secular stagnation" is, the eurozone desperately needs more expansionary policy (extraordinary monetary policy and coordinated fiscal expansion). In the US (and UK), the arguments are much more nuanced. The US would benefit from a substantial increase in public investment, as well as from structural policies (tax, spending, and others) to reduce inequality. The UK needs to boost investment as well, both public and private, particularly in housing supply.
Jagjit Chadha National Institute of Economic and Social Research	Disagree	Very confident	There is probably always room for more structural reform but it should not target a particular rate of return. Fiscal policy may have some role to play in infrastructure investment but in many countries, with the exception of Germany, there is not much room for manoeuvre.
David Smith Sunday Times	Disagree	Confident	I am not convinced that the natural rate of interest is in negative territory, so no.
Fabien Postel-Vinay University College London	Disagree	Not confident
Michael McMahon University of Oxford	Agree	Confident	Given the lack of monetary policy options at the moment, I do believe that efforts should be taken to attempt to both reduce the supply of saving, especially precautionary saving, and also boost the demand for investment. All possible policies should be considered and evaluated.
Paul De Grauwe London School of Economics	Neither agree nor disagree	Confident	I am not convinced that the natural rate has become negative. As s result, I find it difficult to answer this question as it assumes that the natural rate is negative today.
Paolo Surico London Business School	Disagree	Not confident
Nicholas Oulton London School of Economics	Disagree	Confident	For the reasons given in my comment on question 1, I think framing the problem in terms of secular stagnation is wrong, so I disagree. But if “pushing the natural rate into positive territory” is just code for more expansionary fiscal policy by the Eurozone countries in current account surplus like Germany and the Netherlands, and more expansionary monetary policy by the ECB, then I would agree. However, since this hasn’t happened in the seven years since the crisis began, I am not sure it will ever happen. The big danger at the moment is another recession in the Eurozone but even this is less likely to lead to a change in German policy than to the breakup of the Eurozone.
Andrew Mountford Royal Holloway	Strongly Agree	Extremely confident	In my view the UK economy is suffering from underinvestment - both private and public. Our R&D is below average for the OECD let alone world leading economies. See http://www.oecd-ilibrary.org/science-and-technology/gross-domestic-expenditure-on-r-d_2075843x-table1 Increased public investment can be complementary to private investment. Efficient transport, cheaper energy supplies, faster mobile communications, better educated workforce should all make private investment more productive and so raise the private rate of return and so the equilibrium interest rate. As I said in answer to the first question the equilibrium interest rate will also not be independent of the income distribution. A permanent increase in taxes on the wealthy (e.g land) to redistribute permanently to poor pensioners would increase the rate of return to industries that serve them. I would therefore expect increased private investment in e.g. the health care sector at the expense of, I would think, only a small reduction in investment in land.
Sir Christopher... London School of Economics	Strongly Disagree	Confident	Especially in Europe, where because of the inability of the ECB to act to raise inflation to its target of 2% fiscal policy needs to be more expansionary to offset the deflationary impact of the monetary policy. Structural reforms take long to have positive effects. Eventually they will get us there but there is no reason to waste so much output in the meantime. More expansionary fiscal policy until recovery comes will speed up the time that structural policies need to have an effect
George Buckley Deutsche Bank	Agree	Not confident	If the problem is one of secular stagnation - which we can't be sure - then neutral rates are too low for actual rates to be stimulatory. There are two ways to deal with this - first, provide enough policy support, perhaps via QE, that effective current policy rates are close to the neutral rate. Note that some central banks have attempted to estimate how much QE is worth in terms of negative interest rate equivalent. A second option is to try to raise the natural rate so that no further monetary stimulation is required for current policy settings to be stimulatory. In reality, a combination of both is required.
Michael Wickens Cardiff Business School & University of York	Neither agree nor disagree	Confident	The natural rate is positive irrespective of policy. The question should be about the real interest rate. In the US and UK there is no need for a policy stimulus. The main problem area is the eurozone. Many of these countries need a money financed fiscal stimulus but this is not possible given the constraints on the ECB.
Morten Ravn University College London	Neither agree nor disagree	Very confident	As I mentioned above, I am not in full agreement with the definition of the secular stagnation hypothesis and I think one needs to think beyond real interest rates. To the extent that secular stagnation refers to persistent episodes of levels of activity below potential, I think that monetary and fiscal policy may be important to the extent that they impact on incentives to save but structural reform is perhaps even more important. Unemployment in Greece and Spain are close to 25 percent, youth unemployment is at 50 percent, and I believe it would be foolish to think that this can be addressed by standard stabilization policies only (or even mainly).
Silvana Tenreyro London School of Economics	Disagree	Confident	The natural rate of interest per se should not be a target for structural or fiscal policy (for one, it is difficult to measure!); unemployment and other labour market variables---among others---are more informative and relevant indicators to guide policy actions.
Patrick Minford Cardiff Business School	Neither agree nor disagree	Confident	Again, I think the definition involved is confused and so cannot really give a clear answer. If the UK and the US and related advanced economies (not to speak of the emergent economies) have no particular 'stagnation' problem, whereas Japan and the euro-zone do for the reasons given, then there is in principle a good real return to be had on capital in the former set of countries and a low or even negative one to be had in Japan and the euro-zone. the answer to this problem is for capital to flow from these countries to the others until the real rate rises in them to the world level. I would agree that in these latter two countries there would be room for stimulative policies under suitable 'reform'- which in Japan would mean 'third arrow' policies and in the ruo-zone would mean the abandonment of the whole current 'euro orthodoxy'. But my firm assessment is that neithr poltical development is at all likely.
Alan Sutherland University of St. Andrews	Agree	Not confident
Tony Yates University of Birmingham	Neither agree nor disagree	Confident	Given the trajectory of inflation in say the US and the UK, one could make a case for mildly more stimulatory policy, but not much more. In the EZ things are much clearer that greatly more stimulatory fiscal and monetary policy should be implemented. Here I'm taking the trajectory of inflation relative to target as a rough proxy for whether, given the natural rate, policy is sufficiently stimulatory or not. That is not foolproof, and the models that would justify it beg many questions. But without them I would not know how to proceed.
Costas Milas University of Liverpool	Agree	Confident	Agree with reference to structural policies. We need to be cautious in terms of how expansionary fiscal policy needs to be as this should be conditional on whether the budget deficit-to-GDP ratio and/or the Debt-to-GDP ratio is sufficiently "low".
Ethan Ilzetzki London School of Economics	Disagree	Not confident
Francesco Caselli London School of Economics	Neither agree nor disagree	Not confident
Kate Barker British Coal Staff Superannuation Scheme and University Superannuation Scheme	Agree	Not confident
John VanReenen London School of Economics	Agree	Confident
Simon Wren-Lewis University of Oxford	Strongly Agree	Extremely confident	An unusual degree of fiscal contraction has caused a slow recovery in the US, a delayed recovery in the UK, and a second recession in the Eurozone. This is all unnecessary and damaging, and so should be reversed, whether we have secular stagnation or not.
Tim Besley London School of Economics	Disagree	Not confident

How the experts responded

Do Western economies suffer from secular stagnation

Should government policies aim at increasing the natural interest rate?

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