Working Paper

Some Thoughts on Secular Stagnation, Loanable Funds and the ZLB

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I have read the various conference papers and am struck by the fact that many use the (omnipresent New-Keynesian) model of an aggregate loanable funds market to diagnose secular stagnation and investigate possible remedies.

This is for instance the approach of Rachel & Smith (both of the Bank of England) who try to explain the secular decline in real interest rates; of Lu & Teulings (Cambridge University), who argue that there is a demographic imbalance (a large cohort of people born in the 1950s and 1960s, who are saving much for their retirement; and a smaller cohort of people born during the 1970s and later, the period of the “pill”) which explains a rise in savings which depresses the natural interest rate below the ZLB; and it is also the model of choice of Benigno and Fornarno as well as Eggertson, Mehotra and Robbins.