Short-Run Effects of Lower Productivity Growth: A Twist on the Secular Stagnation Hypothesis

Olivier Blanchard (PIIE), Guido Lorenzoni (Northwestern University) and Jean Paul L'Huillier (Einaudi Institute for Economics and Finance)

Policy Brief
February 2017
Photo Credit: 
REUTERS/Brendan McDermid

Despite interest rates being very close to zero, US GDP growth has been anemic in the last four years largely due to lower optimism about the future, more specifically to downward revisions in growth forecasts, rather than legacies of the past. Put simply, demand is temporarily weak because people are adjusting to a less bright future. The authors suggest that downward revisions of productivity growth may have decreased demand by 0.5 to 1.0 percent a year since 2012. This explanation, if correct, has important implications for policy and forecasts. It may weaken the case for secular stagnation, as it suggests that the need for very low interest rates to sustain demand may be partly temporary. It also implies that, to the extent that investors in financial markets have not fully taken this undershooting into account, the current yield curve may underestimate the strength of future demand and the need for higher interest rates in the future. The authors’ hypothesis is not an alternative to the secular stagnation hypothesis but a twist on it. They do not question that interest rates will probably be lower in the future than they were in the past but argue that, for a while, they may be undershooting their long-run value.

Data Disclosure: 

The data underlying this analysis are available here. The package for the FRB/US model is available here.