Reasons for the Demise of Interest: Savings Glut and Secular Stagnation or Central Bank Policy?

32 Pages Posted: 21 Nov 2019

See all articles by Thomas Mayer

Thomas Mayer

University of Witten/Herdecke

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Date Written: October 30, 2019

Abstract

In this paper we compare the Keynesian, neoclassical and Austrian explanations for low interest rates and sluggish growth. From a Keynesian and neoclassical perspective low interest rates are attributed to ageing societies, which save more for the future (global savings glut). Low growth is linked to slowing population growth and a declining marginal efficiency of investment as well as to declining fixed capital investment due to digitalization (secular stagnation). In contrast, from the perspective of Austrian business cycle theory, interest rates were step by step decreased by central banks to stimulate growth. This paralyzed investment and growth in the long term. We show that the ability of banks to extend credit ex nihilo and the need of time to produce capital invalidates the IS identity assumed in the Keynesian theory to hold permanently. Furthermore, we find no empirical evidence for the global savings glut and secular stagnation hypotheses. Instead, low growth can be explained by the emergence of quasi “soft budget constraints” as a result of low interest rates, which reduce the incentive for banks and enterprises to strive for efficiency.

Keywords: Mises, Hayek, Keynes, Hansen, Summers, secular stagnation, aging societies, global savings glut, monetary policy, central banks, credit creation.

JEL Classification: E12, E14, E32, E43

Suggested Citation

Mayer, Thomas and Schnabl, Gunther, Reasons for the Demise of Interest: Savings Glut and Secular Stagnation or Central Bank Policy? (October 30, 2019). Available at SSRN: https://ssrn.com/abstract=3478451 or http://dx.doi.org/10.2139/ssrn.3478451

Thomas Mayer

University of Witten/Herdecke

Alfred-Herrhausen-Straße 50
Witten, 58448
Germany

Gunther Schnabl (Contact Author)

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Straße 12
Leipzig, 04109
Germany

HOME PAGE: http://www.wifa.uni-leipzig.de/iwp/

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