Keyword: secular stagnation

Thomas Mayer; Gunther Schnabl

Abstract

We compare the New Keynesian and Austrian explanations for low interest rates in the light of the Corona crisis. From a New Keynesian perspective low interest rates are the result of structural changes in the society and the economy as well as the cyclical downswing triggered by the Corona pandemic. In contrast, from the perspective of Austrian economic theory, interest rates have been pushed down on trend by central banks for a long time to stimulate growth, with the global financial crisis of 2007/08 and the Corona crisis of 2020 acting as powerful accelerators of the euthanasia of interest. New Keynesian theory would suggest that interest rates can be adjusted upward again when conditions change, without creating economic and financial disturbances. Against this, Austrian theory finds that central banks have backed themselves into a corner by creating persistent low-interest expectations.

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

JEL Codes: E12, E14, E32, E43.

Erschienen in

Journal of Policy Modeling Volume 43, Issue 6, November–December 2021, Pages 1241-1258.

Download

via Science Direct

Thomas Mayer; Gunther Schnabl

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: growth, interest, savings, secular stagnation.

JEL Codes: E12, E14, E32, E43.

Erschienen in

Quart J Austrian Econ (2021) 24.1:3–40.

Download

via QJAE