Secular Stagnation
Quick Definition
A prolonged period of slow economic growth and low interest rates caused by structural factors like aging demographics, weak investment demand, and excess savings.
Key Takeaways
- Prolonged slow growth from structural factors, not cyclical downturns
- Caused by excess savings, aging demographics, and weak investment demand
- The natural real interest rate falls below zero, limiting monetary policy
- Originally proposed by Hansen (1938), revived by Summers (2013)
- Japan is the most frequently cited real-world example
What Is Secular Stagnation?
Secular stagnation is a theory describing a prolonged period of negligible or no economic growth in a market economy, caused by structural rather than cyclical factors. Originally proposed by Alvin Hansen in 1938 and revived by Larry Summers in 2013, the theory argues that chronic excess saving relative to investment demand pushes the "natural" real interest rate below zero. Contributing factors include aging demographics (slower labor force growth), declining population growth, rising inequality (wealthy save more), lower capital intensity of the digital economy, and a global savings glut. When the natural rate falls below zero, central banks cannot stimulate the economy adequately with conventional monetary policy because nominal rates cannot go much below zero. Critics argue secular stagnation is overstated and that technological innovation, particularly AI, may boost productivity and growth.
Secular Stagnation Example
- 1Larry Summers argued in 2013 that the U.S. had entered secular stagnation, with the natural interest rate falling below zero due to excess global savings.
- 2Japan is often cited as the primary example of secular stagnation, with decades of near-zero growth, aging demographics, and persistent deflation.
- 3Proponents argue that without persistent fiscal deficits, secular stagnation economies cannot achieve full employment even with zero interest rates.
Related Terms
Economic Growth
The increase in the production of goods and services in an economy over time, typically measured by the growth rate of real GDP.
Liquidity Trap
A situation where interest rates are near zero and monetary policy becomes ineffective because people hoard cash rather than spending or investing.
Deflation
A sustained decrease in the general price level of goods and services, resulting in increasing purchasing power of money.
Monetary Policy
Actions by a central bank to manage the money supply and interest rates to achieve macroeconomic objectives like stable prices and full employment.
Fiscal Policy
Government decisions about taxation and spending used to influence economic conditions and achieve macroeconomic goals.
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