Thread by @VMRConstancio

Important new academic paper by Summers & Rachel in Brookings AP
brookings.edu/wp-content/upl…
Documents that “that neutral real interest rates have declined by at least 300 basis points over the last generation” in the advanced economies (OECD) 1/n

Using different methods and well justified non-Ricardian macro models to determine the positive offsetting effect of public debt and conclude that “ the “private sector neutral real rate” may have declined by as much as 700 basis points since the 1970s” . One partial result: 2/n

This trend of secular stagnation of the private sector savings/investment behaviour, implying quite negative equilibrium interest rates without the State indebtness, has profound consequence for future macro policies in advanced economies. 3/n

“ ... the private economy is prone to being caught in an underemployment equilibrium ... . Full employment in recent years has been achieved ... either through large budget deficits as in the United States or Japan or large trade surpluses as in Germany. 4/n

“ ...It is worth considering that in the United States during the period prior to the financial crisis, negative real short term interest rates, a huge housing bubble, erosion of credit standards and expansionary fiscal policy were only sufficient to achieve moderate growth” 5/n

So, policies must “.. do some combination of accepting high and rising deficits and government debt levels, living with real interest rates very close to zero or negative, and finding structural policies that promote investment or reduce saving” Quite challenging and sobering 6/6

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