posted at 05:50
Author Name: Myles Udland
Goldman Sachs On Secular Stagnation
REUTERS/Stefan WermuthFormer Harvard University President Lawrence H. SummersAbout a year ago, former Treasury secretary Larry Summers gave his famous speech at the IMF about "Secular stagnation." The basic idea behind secular stagnation is that the economy in its current condition is unable to create enough demand to sustain its growth trend, requiring negative interest rates for the Fed to hit its employment and inflation goals. In a note to clients over the weekend, Goldman Sachs economist Jari Stehn revisits Summers' hypothesis, and writes that while it's still early, there are signs pointing towards a US economy that may not be stuck in secular stagnation. The key figure proponents of the secular stagnation hypothesis point to is the "Output gap" that has shown up in the economy since about 2006. The the economy has failed to close this "Output gap" has been a staple of the argument that we're stuck in secular stagnation, and that our economic problems of the last several years are secular rather than cyclical. While Stehn notes that this is just a preliminary sign rejecting secular stagnation - and that these gains have been made with rates at 0% - the improvement in the CAI is a sign that the economic malaise of the last 5 or so years was cyclical rather than secular. As far as monetary policy is concerned, Stehn writes that even if the economy has been slow to recover due to cyclical rather than secular problems, it will likely still be appropriate to keep policy accommodative. Stehn is optimistic that the US economy, while disappointing over the last several years, is not stuck in the economic purgatory that secular stagnation implies.

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