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

17 Pages Posted: 13 Feb 2017

See all articles by Olivier J. Blanchard

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Guido Lorenzoni

Northwestern University; National Bureau of Economic Research (NBER)

Jean-Paul L'Huillier

Brandeis University

Date Written: February 2017

Abstract

Since 2010, U.S. GDP growth has been anemic, averaging 2.1% a year, and this despite interest rates very close to zero. Historically, one would have expected such low sustained rates to lead to much stronger demand. They have not. For a while, one could point to plausible culprits, from a weak financial system to fiscal consolidation. But, as time passed, the financial system strengthened, fiscal consolidation came to an end, and still growth did not pick up. We argue that this is due, in large part, not to legacies of the past but to lower optimism about the future, more specifically to downward revisions in forecast potential growth. Put simply, the anticipation of a less bright future is leading to temporarily weaker demand. If our explanation is correct, it has important implications for policy and for forecasts. It may weaken the case for secular stagnation, as it suggests that the need for very low interest rates may be partly temporary.

Suggested Citation

Blanchard, Olivier J. and Lorenzoni, Guido and L'Huillier, Jean-Paul, Short-Run Effects of Lower Productivity Growth. A Twist on the Secular Stagnation Hypothesis (February 2017). NBER Working Paper No. w23160. Available at SSRN: https://ssrn.com/abstract=2915987

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

Guido Lorenzoni

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jean-Paul L'Huillier

Brandeis University ( email )

Waltham, MA 02454-9110
United States

HOME PAGE: http://https://sites.google.com/site/jplhuill/

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