Fiscal Policy in an Age of Secular Stagnation

Abstract

An ongoing period of secular stagnation in advanced economies has brought down interest rates, growth rates and inflation. Due to the relatively larger fall in interest rates, the differential between the interest rate paid on government debt and the output growth rate (IRGD) became lower and has even turned negative in most advanced economies. In such an environment, public debt may come at much lower (or even no) cost. Thus, if this pattern remains stable, it has important implications on the role of fiscal policy. Against this background, this paper discusses relevant long-term trends in Europe and aims to explain the currently low IRGD. Furthermore, it investigates possible future IRGD paths and its consequences for fiscal policy.

Secular stagnation: Is immigration part of the solution?

“…The policy measures proposed in a context of secular stagnation differ depending on whether secular stagnation is viewed as demand side or supply side. Buchner (2020) highlights the relevance of expansionary fiscal policy in a context of secular stagnation. In an environment of persistently low interest rates, expansionary fiscal policy and fiscal sustainability no longer need to be seen as a trade-off.…”

“…Depending on if one views secular stagnation as demand sided or supply sided, the policy measures proposed in a context of secular stagnation vary. Buchner (2020) highlights the pertinence of expansionary fiscal policy in a context of secular stagnation.…”

Secular Stagnation: Is Immigration Part of the Solution?

“…Depending on if one views secular stagnation as demand sided or supply sided, the policy measures proposed in a context of secular stagnation vary. Resorting to a country-fixed effects panel data regression analysis, Buchner (2020) highlights the pertinence of expansionary fiscal policy in a context of secular stagnation. In an environment of persistent low interest rates, expansionary fiscal policy and sustainability of public finances no longer must be looked at as a trade-off.…”

Is There Asymmetry in the Relationship Between Government Consumption Dynamics and Economic Activity? Evidence From G7 Economies

“…Logically, questions are raised about the effectiveness of economic policy by managing the business cycle in changing and evolving macroeconomic conditions, especially in the desire to overcome this turbulent epidemic period with as much as possible low direct and indirect costs. If over the last decade, a mild consensus has been established about reduced efficiency of monetary policy in periods of zero lower bound (Di Bucchianico, 2021;Bernanke, 2020), simultaneously, fiscal policy has gradually gained in importance at both scientific (Buchner, 2020) and political (Gaspar et al, 2021;Schnabel, 2021) levels. Moreover, it was the epidemic period that demonstrated the true potency of fiscal transfer policy to stimulate aggregate demand in real-time.…”