Long-Lasting Consequences of the European Crisis

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu Terms of use: Documents in Working Paper SeriesLong-lasting consequences of the European crisis AbstractThe Great Recession and the subsequent European crisis may have long-lasting effects on aggregate demand, aggregate supply, and, hence, on macroeconomic performance over the medium and long-run. Besides the fact that financial crisis last longer and are succeeded by slower recoveries, and apart from the hysteresis effects that may operate after episodes of long-term unemployment, the combination of high (public and private) debt and low population and productivity growth may create significant constraints for monetary and fiscal policies. In this paper I develop an OLG model, one earlier used by Eggertsson and Mehrotra (2014) to rationalize the "secular stagnation hypothesis", to show how high debt, and low population and productivity growth may condition the macroeconomic performance of some European countries over the medium and long-run.JEL Codes: E20, E43, E52, E66 Keywords: natural rate of interest, zero lower bound, population and productivity growth, inter-generational transfers, secular stagnation.ECB Working Paper 1832, July 2015 1 Non-Technical SummaryAlmost eight years after the financial turmoil that signalled the start of the recent economic crisis, GDP and employment are still below their pre-crisis levels in many European countries. Slow and jobless recoveries, if they may even be termed recoveries, are being observed throughout Europe. In broader terms, the economic literature approaches the causes of these slow recoveries by: i) addressing the financial origins of the crisis, ii) emphasising transmission mechanisms through which temporary negative shocks may have long-lasting effects, and iii) revisiting the "secular stagnation hypothesis", that hints at the possibility that a temporary deleveraging shock yields a permanent liquidity trap in which demand is permanently too low and real interest rates sufficiently negative for monetary policy to be permanently constrained by the Zero Lower Bound on policy interest rates.Indeed, the European economy has to face the legacy of the Great Recession in a low growth scenario, due to population ageing, and diminished expectations of productivity growth. Moreover, demographic prospects may have significant economic consequences, affecting to patterns of consumption and potential growth (both through employment and TFP growth). This paper shows how the interaction of the legacy of...

The Unbearable Divergence of Unemployment in Europe

“…In fact, if one takes seriously the hypothesis that Europe, given its demographic and productivity outlook, is bound to suffer from a permanent shortfall in demand (the so-called secular stagnation hypothesis), then "there is room for doubt about whether the cycle actually cycles" (Summers, 2014), and higher wage inflation would bring the economy closer to the full employment equilibrium (see Eggertsson and Mehrotra, 2014;Jimeno, 2015). …”

Demographic Structure and Macroeconomic Trends

“…Finally, our work is also related to the Alvin Hanson's recently popularised argument on whether mature economies are experiencing a long lasting stagnation due to permanently low demand. Most of this literature currently focuses on the effects of aggregate demand externalities in periods of financial deleveraging that may lead to prolonged periods of lower real rates of return (see Eggertsson and Mehrotra (2014) and Jimeno (2015)). By linking demographic changes to innovation and output growth, our results provide further indication that OECD economies are more likely to experience episodes where aggregate demand externalities together with supply side channels may lead to stagnation in the following decades.…”

Demographic Structure and Macroeconomic Trends

“…Our work is also related to the Alvin Hanson's recently popularised argument on whether mature economies are experiencing a long lasting stagnation due to permanently low demand. Most of this literature currently focuses on the effects of aggregate demand externalities in periods of financial deleveraging that may lead to prolonged periods of lower real rates of return (furthermore, these effects are amplified the lower the population and productivity growth rates, see Eggertsson and Mehrotra (2014) and Jimeno (2015)). By linking demographic changes and future low real interest rates and output growth, our results provide further indication that OECD economies are more likely to experience episodes where aggregate demand externalities may lead to stagnation in the following decades.…”