Must-Read: Charles Bean: Causes and Consequences of Persistently Low Interest Rates

Must-Read: So what is the argument against shifting the monetary-policy target to 4%/year PCE inflation or 6%/year nominal GDP growth again? I mean, Larry Summers and I wrote 23 years ago that the danger of hitting the zero lower bound made it potentially unwise to aim to push inflation much below 5%/year–and that was when we expected both a small equity risk premium–hence Treasury rates not far below the return on physical investment–and not a global savings glut but rather a global savings shortfall:

Charles Bean: Causes and Consequences of Persistently Low Interest Rates: “Demographic developments… the partial integration of China…

…and the associated capital outflows…. a lower propensity to invest… as a result of heightened risk aversion…. Rates should eventually return to more normal levels…. But… the time scale… is highly uncertain and will be influenced by longer-term fiscal and structural policy choices…. With current inflation targets of around 2%, episodes where policy rates are constrained by their lower bound are likely to become more frequent and prolonged… how easy it is in such circumstances to slip into a deflationary trap–and how difficult it can be to escape it….

October 26, 2015


Brad DeLong
Connect with us!

Explore the Equitable Growth network of experts around the country and get answers to today's most pressing questions!

Get in Touch