Nova workboard

a blog from young economists at Nova SBE


Secular Stagnation. Myth or fact?

Secular Stagnation is the persistent phenomenon of negligible or zero economic growth (Hansen, 1938). The concept was first introduced by Alvin Hansen, an American economist well-known for his strong support of the theories of John Maynard Keynes, in a speech in 1938. Hansen formed this theory arguing that the Great Depression could be the beginning of an era of economic stagnation with indeterminate duration. The major triggers were the decline in the working-age population growth and consequently the shrink in demand.  His concerns rapidly were forgotten by society as WWII required tremendous increases in government expenditure ending the concerns of insufficient demand (Arsov and Ravimohan, 2016).

Larry Summers recovered the concept in 2013 in the attempt of explaining the sustained low growth of GDP in the US after the Great Financial Crisis (GFC). Summers argues that this is occurring due to a systemic excess savings over investments in the industrial world, driven (mostly) by increases in technology that raise inequalities (that increase the share of income directed at those with lower propensity to spend) and by shifts in investments from developed to emerging countries, decreasing the demand for capital and subsequently decreasing the nominal investment spending (Summers, 2014a).

The opinion among economists about this topic is controversial. While those mentioned above and others such as Paul Krugman and Adair Turner find secular stagnation a major concern, others are skeptical about it. Ben Bernanke argued in 2012 that US economic stagnation was being affected by post-GFC headwinds but within the business cycle; Rogoff and Lo believed this low growth could be explained by the debt overhang; and likewise, Hamilton et al. claimed that temporary headwinds from the housing supply overhang and other conditions decreasing growth after GFC were the determinants of the sustained low growth (Roantree, 2016).

In my opinion, we should not be conclusive on whether we are facing secular stagnation, but that similarly we should not discredit this theory as the biggest mistake would be being unprepared if it is true (just like economists believed there were no such things as bubbles before the GFC).

Secular Stagnation and Zero Lower Bound. Policy Implications?

Assuming, in fact, we are facing secular stagnation, one could say that, if this is a demand side problem (Summers, 2014), we could use monetary and fiscal policy to expand aggregate demand (AD).

Central Banks could print money, decreasing the interest rate and consequently expand the aggregate demand through investments (Keynes effect). However, industrial countries are facing a zero lower bound (ZLB) reality meaning that short-term nominal interest rates are at or near zero. This liquidity trap constrains the CB´s ability in facilitating economic growth through money supply. Before a ZLB scenario, the monetary authority could still affect the real interest rate through the Fisher equation by increasing expectations of inflation, which could boost consumption and investments. However, in a liquidity trap, markets expect all monetary policies to be ineffective, and instead of a positive consequence, the increase in the real interest rate could lead the economy to enter a deflationary spiral (further increasing the real interest rates and decreasing economic action) (Krugman,1998).

Alternatively, one could argue that fiscal policy is the solution. Increases in government spending will directly boost the aggregate demand (AD = Consumption + Investment + GovernmentExpenditure + TradeBalance). But is it that straightforward? As the debt-to-GDP ratio increases in an economy, a spending shock on real GDP becomes negative instead of positive (ECB, 2013). The argument is that expansionary fiscal policy demands creditworthiness to borrow, which indebted countries lack, hence such policy would change savings rates in undesirable direction (Barro, 1989). This negative effect is larger the smaller, the more indebted and the more open an economy is (Roantree, 2016).

Given everything stated above, what are the prospects to indebted countries at zero lower bound? Consider the example of Japan (annexes 1, 2 and 3), with a low GPD growth trend (see Annex 1), general government debt of 234% (as a % of GDP, OECD data 2015), when a ratio of 60% is often noted as the prudential limit for developed countries, and with a short-term interest rate of 0.06% (% per annum, OECD 2017). Is it reasonable to be skeptical about secular stagnation given the data?

Secular Stagnation. Dead-end or are there possible solutions?

Despite the ZLB problem limiting monetary and fiscal policy and making the secular stagnation phenomenon more plausible, some economists stay positive and suggest that unconventional and structural measures can be the solution for the current situation of sustained low growth (mostly) in developed countries.

Summers (2013) claims that the first thing to be done is to find ways to decrease interest rates. Barra Roantree, research economist at the Institute for Fiscal Studies (IFS), in his paper “Standing at the abyss: monetary policy at the zero lower bound” first examines how unconventional policies taken in response to the Great Depression (such as quantitative easing, credit easing and fiscal stimulus programmes along with bank guarantees) were beneficial to threshold the transmission mechanism but not to decrease interest rates as needed to expand AD. Afterwards, he discusses three possible solutions: the abolition of physical currency, Gesellian stamped currency and commitment devices. The first solution would lead money not to be constrained to weakly positive interest rates. He advocates the technology needed to eliminate physical currency exists and is already implemented in developed countries. This electronic system would bring benefits for taxpayers and governments (reduced transaction costs), however concerns about infringing individual rights by monitoring economic actions and about losses in CB´s revenues from issuing currency would arise. The second works as a carry tax, allowing CB to break the ZLB constraint. This solution was formerly proposed by Gesell (1958) and resurrected by Goodfriend (2000), but Roantree finds that the boldness of this step and the consequent increases in carrying currency’s costs would require further considerations. The last solution also answers to the expectations within a liquidity trap environment problem. Open market operations in long-term bonds (for example) can act as such commitment devices (Bernanke and Reinhart, 2004). The argument is that through such measures CB can more plausibly promise a higher future inflation, influencing savings and investment decisions. However, facing secular stagnation, unconventional measures by themselves may prove not to be enough, requiring further macroeconomic reflections.

In my opinion structural policies (long-term measures) may be a first good strategy to induce increases in growth. Policy makers could think of tools aiming at solving the economic problems that the ageing of population arise such as increasing the minimum retirement age, with lower work hours and lighter labor income taxes or promoting volunteering programs in elderly health care, reducing healthcare and welfare costs (Nikolova, 2016); and create more mechanisms to reduce inequalities in income and wealth through improvements in the education system and further implementations of anti-discrimination policies (OECD, 2012).


In this article, the possibility that developed countries may be facing secular stagnation is discussed. The concept was earlier proposed by Alvin Hansen, following the Great Depression and resurrected later in 2013 by Larry Summers in his attempt to explain the sustained low growth since the GFC.

The ZLB environment imply that monetary policy is no longer useful to boost demand and, with high debt-to-GDP ratios, using fiscal policy can lead to further recession. The inefficiency of these two types of policies create suspicions on the presence of something secular (additional to the doubts risen by the data, supporting the sustained low growth in developed countries).

Given this, unconventional solutions such as the abolishment of physical currency (breaking ZLB constraint) and structural measures aiming at, for example, reducing inequalities (fixing the systematic savings over investments situation) come as possible solution for this problem. In my opinion, the fundamental thing is policymakers being aware of this possibility, instead of being skeptical, and them to be prepared if indeed we are facing secular stagnation.


Margarida Pessoa Vaz, number 3681


References and Additional Bibliography

Arsov, I. and Ravimohan, A., 2016. ‘Secular Stagnation: A review of the key arguments’. JASSA The Finsia Journal of Applied Finance, Issue I.

Barro, R., 1989. ‘The Neoclassical Approach to Fiscal Policy’. Harvard University Press and Basil Blackwell Publishers.

Bernanke, B., Reinhary, V. and Sack, B., 2004. ‘Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment’. Brookings Papers on Economic Activity, 2004 (2).

Boianovsky, M., 2015. ‘A brief history of secular stagnation’. [online] World Economic Forum. Available at:

Davies, G., 2013. ‘The implications of secular stagnation’. © The Financial Times Limited [2013] {}

Goodfriend, M., 2000. ‘Overcoming the Zero Bound on Interest Rate Policy’. Journal of Money, Credit and Banking.

ECB (2013). ‘Fiscal Stimulus in Times of High Debt Reconsidering Multipliers and Twin deficits’. [online] Available at:

Investigating ´Secular Stagnation’, 2016. [video: New Economic Thinking Institute.

Krugman, P., 1998. ‘It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap’. Brookings Papers on Economic Activity.

Krugman, P., 2014. ‘Four observations on secular stagnation’. VOX, CEPR’s Policy Portal.

Nikolova, M., 2016. ‘Two solutions to the challenges of population aging’. The Brookings Institutions. Available at:

Roantree, B., 2016. ‘Standing At The Abyss: Monetary Policy At The Zero Lower Bound’. Essay 5 {}

Rogoff, K. and Lo, S., 2015, ‘Secular stagnation, debt overhang and other rationales for sluggish growth, six years on’, Bank for International Settlements Working Papers.

Summers, L., 2014. ‘Reflections on the new ‘Secular Stagnation hypothesis’. VOX, CEPR’s Policy Portal.

Summers, L 2014a, ‘U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound’, Business Economics, vol. 49.

Summers, L., 2016. ‘Secular Stagnation and Monetary Policy’. Federal Reserve Bank of St. Louis Review, Second Quarter 2016, 98(2), pp. 93-110. {}.