Economics & Growth | Fiscal Policy
Secular Stagnation Theory Is Now Mainstream
- By Julius Probst, PhD
- 3 min read
Japan has been stuck in a zero-interest rate environment since the 1990s. While most consider the country an anomaly, economists like Paul Krugman and Ben Bernanke warned about the Japanese liquidity trap even before 2008. After the global financial crisis, many other advanced economies suddenly faced the zero-lower bound (ZLB) on interest rates too.
Krugman famously showed that central banks have difficulties increasing aggregate demand when interest rates are stuck at zero and that even large injections of base money (quantitative easing, QE) could be ineffective. However, the liquidity trap was supposed to be a temporary equilibrium.
In 2013, Larry Summers revived the secular stagnation theory and outlined that the low growth and low interest rate environment could be permanent. Ever since, interest rates and inflation rates have continued their downward secular trend, and growth rates have disappointed too…
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