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Short-Run Effects of Lower Productivity Growth: A Twist on the Secular Stagnation Hypothesis

Listed author(s):
  • Olivier Blanchard

    ()

    (Peterson Institute for International Economics)

  • Guido Lorenzoni

    (Northwestern University)

  • Jean Paul L'Huillier

    (Einaudi Institute for Economics and Finance)

Despite interest rates being very close to zero, US GDP growth has been anemic in the last four years largely due to lower optimism about the future, more speci?cally to downward revisions in growth forecasts, rather than legacies of the past. Put simply, demand is temporarily weak because people are adjusting to a less bright future. The authors suggest that downward revisions of productivity growth may have decreased demand by 0.5 to 1.0 percent a year since 2012. This explanation, if correct, has important implications for policy and forecasts. It may weaken the case for secular stagnation, as it suggests that the need for very low interest rates to sustain demand may be partly temporary. It also implies that, to the extent that investors in ?nancial markets have not fully taken this undershooting into account, the current yield curve may underestimate the strength of future demand and the need for higher interest rates in the future. The authors' hypothesis is not an alternative to the secular stagnation hypothesis but a twist on it. They do not question that interest rates will probably be lower in the future than they were in the past but argue that, for a while, they may be undershooting their long-run value.

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File URL: https://piie.com/publications/policy-briefs/short-run-effects-lower-productivity-growth-twist-secular-stagnation
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Paper provided by Peterson Institute for International Economics in its series Policy Briefs with number PB17-6.

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Date of creation: Feb 2017
Handle: RePEc:iie:pbrief:pb17-6
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  1. Olivier J. Blanchard & Jean-Paul L'Huillier & Guido Lorenzoni, 2013. "News, Noise, and Fluctuations: An Empirical Exploration," American Economic Review, American Economic Association, vol. 103(7), pages 3045-3070, December.
  2. Michael Bruno & Jeffrey D. Sachs, 1985. "Economics of Worldwide Stagflation," NBER Books, National Bureau of Economic Research, Inc, number brun85-1, October.
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