Lower interest rates have not stimulated the economy, Larry Summers says.
CAMBRIDGE, Mass. — The world’s central bankers and the scholars who follow them are having their annual moment of reflection in Jackson Hole, Wyo. But the theme of this year’s meeting, “Challenges for Monetary Policy,” may encourage an insular — and dangerous – complacency.
These developments seem to lend further support to the concept of secular stagnation; indeed, the issue is much more profound than is generally appreciated. According to this view, anything that can be done to reduce real interest rates is constructive, and with sufficient interest-rate flexibility, secular stagnation can be overcome. With the immediate problem being excessive real rates, looking first to central banks and monetary policies for a solution is natural.
Positive and negative effects To take the most ominous case first, with interest-rate reductions having both positive and negative effects on demand, it may be that there is no real interest rate consistent with full resource utilization. Almost every account of the 2008 financial crisis assigns at least some role to the consequences of the very low interest rates that prevailed in the early 2000s. More broadly, students of bubbles, from the economic historian Charles Kindleberger onward, always emphasize the role of easy money and overly ample liquidity.
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