Via Capital Economics:
A recent paper by Larry Summers and Lukasz Rachel has been doing the rounds among economists and has revived debate in financial markets about “secular stagnation”. But what is “secular stagnation”, and what might it mean for economic growth, monetary policy and asset prices?
One problem is that there are competing definitions of secular stagnation. Summers’ theory is anchored in a view that the global economy is prone to prolonged periods where demand runs well below potential supply. (In other words, desired savings exceed desired investment.) As a result, even with extremely supportive monetary and fiscal policies, economies struggle to reach full employment. What’s more, so far as monetary policy goes, this policy accommodation then runs the risk of inflating asset prices and increasing financial vulnerabilities. This version of secular stagnation therefore represents a form of demand pessimism – a belief that policymakers will struggle to generate sufficient demand to keep their economies at full employment in a sustainable manner.