Growth Potential, Natural Rate of Interest and Inflation in Developed Economies

In many advanced economies, there has been a declining trend in potential growth rates over the past thirty years. This development has accompanied the downtrends in inflation rates, as well as in the total factor productivity and natural interest rates – short-term real interest rate consistent with stable, non-inflationary growth. Under the hypothesis of secular stagnation, mentioned phenomenon could be explained in the terms of “saving gluts” – insufficient profitable investment opportunities relative to high global savings rates. Additional explanations are unfavourable demographic trend and, pronounced income inequalities at the global level that limit higher demand growth. The revival of investment activity and the termination of the deleveraging period can contribute to the growth of natural real interest rates and inflation rates, but such development could be limited by the slowdown in global growth in the coming years. Expansion in developed economies is not sustainable in the long run without increasing the productivity and reaching the higher potential growth rates, while today's potential growth rates in fast-growing economies are considerably lower than in earlier periods. The risk of secular stagnation is not a phenomenon isolated only in developed economies but can assume a global dimension.