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

Thomas Mayer,Gunther Schnabl

doi:10.35297/qjae.010085

Abstract

This article compares the Keynesian, neoclassical and Austrian expla-nations for low interest rates and sluggish growth. From a Keynesian and neoclassical perspective, low interest rates are attributed to aging 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 decreased step by step by central banks to stimulate growth. This paralyzed investment and lowered growth in the long term. This study shows that the ability of banks to extend credit ex nihilo and the requirement of time to produce capital goods invalidates the permanent IS identity assumed in the Keynesian theory. Furthermore, it is found that there is no empirical evidence for the hypotheses of a global savings glut and secular stagnation. 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.

Highlights

Since the 1980s, slower economic growth in the industrial countries has been accompanied by lower interest rates, with real interest rates turning negative more recently
Real interest rates calculated based on official consumer price inflation statistics with hedonic price measurement
The original Taylor rule assumes a real interest rate of 2 percent, which was constant and close to the long-term US growth rate of 2.2 percent observed at the time

Summary

INTRODUCTION

Since the 1980s, slower economic growth in the industrial countries has been accompanied by lower interest rates, with real interest rates turning negative more recently (figure 1). The fight against the economic consequences of the severe corona crisis has triggered an even stronger monetary expansion, with even more government bond yields falling into negative territory. Investment, productivity growth, and economic growth have continued to slow. To some observers the pivotal role of central banks in ever-lower levels of interest is evident, representatives of central banks have stressed structural factors as the reasons for low interest rates (Lane 2019, Schnabel 2020)

10 Nominal

Short-Term Interest Rate

Findings

Australia