A CONTAGIOUS MALADY? OPEN ECONOMY DIMENSIONS OF SECULAR STAGNATION

Transcription

1 A CONTAGIOUS MALADY? OPEN ECONOMY DIMENSIONS OF SECULAR STAGNATION Gauti B. Eggertsson, Neil R. Mehrotra Sanjay Singh, and Lawrence Summers Brown University and FRB Minneapolis The views expressed here are the views of the authors and do not necessarily represent the views of the Federal Reserve Bank of Minneapolis or the Federal Reserve System Bank of Canada November 3, / 19

2 SECULAR STAGNATION HYPOTHESIS Secular stagnation hypothesis: Alvin Hansen (1938) and Lawrence Summers (2013) Highly persistent decline in the natural rate of interest Chronically binding zero lower bound Secular stagnation in a closed economy: ZLB of arbitrary duration Distinct policy responses Eggertsson and Mehrotra (2015) 2 / 19

3 RESEARCH QUESTION AND KEY FINDINGS Research questions: Does secular stagnation survive in a open economy framework? What are the channels by which secular stagnation spreads? What are the interactions in policy across countries? Key findings: Capital integration spreads recessions Substantial policy externalities Fiscal policy (+ externalities) Neomercantilism/competitiveness (- externalities) 3 / 19

4 HOUSEHOLDS Objective function: ( ) max U = E t {log C y C y t + β log ( C m t+1) + β 2 log ( C o ) } t+2 t,cm t+1,co t+2 Budget constraints: C y t = By t C m t+1 = Y t+1 (1 + r t )B y t + Ad t+1 + Aint t+1 C o t+2 = (1 + r t+1)a d t+1 + (1 + r t+1 )Aint t+1 (1 + r t )B y t D t 0 A int t+1 K 4 / 19

5 CASE OF r > r Credit-constrained youngest generation: D t C y t = By t = 1 + r t C y t Saving by the middle generation: = B y t = D t 1 + r t Spending by the old: 1 C m t 1 C m t = βe t 1 + r t C o t+1 = βe t 1 + r t C o t+1 C o t = (1 + r t 1 )A d t 1 = (1 + rt 1 )Ad t 1 + (1 + r t 1)K C o t 5 / 19

6 Case of r > r : NATURAL RATE UNDER IMPERFECT INTEGRATION N t B y t = N t 1A d t + N t 1 Aint t N t B y t = N t 1 A d t Expression for the domestic and foreign real interest rate: 1 + r t = 1 + β β 1 + r t = 1 + β β (1 + g t )D t Y t D t ω t 1 1+β ω t 1 β K (1 + g t )D t + 1+r t 1+β K Y t D t 1 K 6 / 19

7 AGGREGATE SUPPLY RELATION Aggregate Supply 1.10 Gross Infla5on Rate Output 7 / 19

8 MONETARY POLICY Inflation targeting: Π t = Π if i > 0 Π t = Π if i > 0 Monetary policy attempts to track the natural rate of interest Cannot attain the natural rate once it falls below inverse of inflation target Inflation target equivalent to simple Taylor rule as Taylor coefficient becomes large 8 / 19

9 Gross Inflation at Home Gross Inflation at Foreign ASYMMETRIC STAGNATION UNDER IMPERFECT INTEGRATION Home AS AD integration AD partial integration 1.15 Foreign AS AD integration AD partial integration Home Output Foreign Output 9 / 19

10 NEOMERCANTILISM Natural rate of interest: Implications: 1 + r = 1 + β β 1 + r = 1 + β β D Y f D + 1+β β (K Bg + IR) D + 1+r 1+β K Yf D K 1+β β Bg Policies that target positive NFA positions or CA surpluses Reserve acquisition lowers natural rate in debtor country May raise natural rate in creditor country depending on financing (debt v. taxation) 10 / 19

11 Gross Inflation at Home Gross Inflation at Foreign NEOMERCANTILISM Home AS AD integration AD autarky 1.15 Foreign AS AD integration AD autarky Home Output Foreign Output 11 / 19

12 Gross Inflation SYMMETRIC STAGNATION UNDER PERFECT INTEGRATION AS AD w shock AD w/o shock A 0.95 B Global Output Linearized Equations 12 / 19

13 Gross Inflation RAISING THE INFLATION TARGET AS AD AD higher & target Global Output 13 / 19

14 EFFECTS OF FISCAL POLICY Balanced budget government purchases: 1 + r = (1 + g) 1+β β (ωd + (1 ω) D ) ω (Y D) + (1 ω) (Y D ) ωg (1 ω) G Interest rate with domestic and foreign public debt: 1 + r = (1 + g) 1+β β (ωd + (1 ω) D ) ω (Y D) + (1 ω) (Y D ) 1+β β (ωbg + (1 ω) B g ) Implications of fiscal expansion: Role for coordinated fiscal expansion since benefits are shared across countries Absent coordination, fiscal expansion would be undersupplied Coordination problem worsens with number of countries 14 / 19

15 Gross Inflation Gross Inflation MULTIPLE EQUILIBRIA UNDER PERFECT INTEGRATION 1.2 (A) Multiple Equilibria 1.2 (B) Unique Equilibrium 1.15 Symm Stag AS Foreign Stag AS Home Stag AS Global AD 1.15 Symm Stag AS Foreign Stag AS Home Stag AS Global AD SS FS HS SS Global Output Global Output 15 / 19

16 Nominal exchange rate: CURRENCY WARS S t = P t P t S t = Π t Π t Exchange rate policy when r w,nat < 0: A pegged exchange rate S t = S eliminates any asymmetric stagnation equilibrium Benefits the nation in stagnation at the expense of the nation not in stagnation Sufficiently aggressive depreciation eliminates the symmetric stagnation as equilibrium 16 / 19

17 Gross Inflation at Home Gross Inflation at Foreign EFFECTS OF STRUCTURAL REFORM AS 1.05 AS AS structural reform 1 A 1 A A" 0.95 B 0.95 B Home Output Foreign Output 17 / 19

18 CONCLUSIONS FOR POLICY 1. Importance of a policy response ZLB can persist for arbitrarily long periods 2. Importance of fiscal policy coordination Fiscal expansions will tend to be undersupplied Fiscal austerity will tend to be oversupplied 3. Risks of beggar-thy-neighbor policies Exchange rate policies may alleviate stagnation in one country while worsening in the other Structural reform and targeting trade surplus similar effects 4. Fiscal policy focused on diminishing oversupply of saving 18 / 19

19 Additional Slides 19 / 19

20 SECULAR STAGNATION EPISODES GDP per capita 7.0% Interest Rate Infla/on Rate % 6.0% United States Real GDP per Capita Projected Output 5.0% 4.0% 3.0% 2.0% 2.0% 1.5% 1.0% 4.65 PotenCal Output Model Output per Capita 1.0% 0.5% % % % 7.0% 3.0% 2.5% % 2.0% 5.0% 1.5% Japan GDP per capita, Pre- Stagna<on Trend Poten<al Output - Model 4.0% 3.0% 2.0% 1.0% 0.5% 0.0% - 0.5% Output - Model 1.0% - 1.0% % % Data Pre- Stagna;on Trend 5.0% 4.5% 3.5% 3.0% Eurozone Poten;al Output Output 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 2.5% 2.0% 1.5% 1.0% 0.5% % 0.0% % % Back 20 / 19

21 US REAL WAGE, EMPLOYER COST INDEX DIVIDED BY PCE PRICE INDEX Apr-03 Sep-03 Feb-04 Jul-04 Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Source: BLS and BEA Back 21 / 19

22 Money demand condition: MONEY i t C m t v (M t ) = 1 + i t Government budget constraint: B g t + M t + T m t g t 1 T o t = G t + ( it 1 B g 1 + g t 1 Π t ) M t Π t 1 t Implications: Assume that money demand is satiated at the zero lower bound Fiscal policy keeps real government liabilities constant Open market operations and QE leave constant the consolidated level of government liabilities Back 22 / 19

23 Equilibrium conditions: CALVO PRICING Y t = L t ( ) pt (l) θ t = dl P t ( p 1 = χπt θ 1 ) 1 θ + (1 χ) t P t ( p t = χπt θ ) θ t 1 + (1 χ) t P t Aggregate supply relation: Y = L 1 χπθ 1 χ ( 1 χ ) θ θ 1 1 χπ θ 1 Back 23 / 19

24 TEMPORARY INCREASE IN PUBLIC DEBT Under constant population and set G t = T y t = Bg t 1 = 0: T m t = B g t T o t+1 = (1 + r t) B g t Implications for natural rate: Loan demand and loan supply effects cancel out Temporary increases in public debt ineffective in raising real rate Temporary monetary expansion equivalent to temporary expansion in public debt at the zero lower bound Effect of an increase in public debt depends on beliefs about future fiscal policy Back 24 / 19

25 INCORPORATING CAPITAL Objective function: ( max U = E t {log C y ) C y t + β log ( C m t+1) + β 2 log ( C o ) } t+2 t,,cm t+1,co t+2 Budget constraints: C y t = By t C m t+1 + pk t+1 K t+1 + (1 + r t ) B y t = w t+1l t+1 + r k t+1 K t+1 + B m t+1 C o t+2 + (1 + r t+1) B m t+1 = pk t+2 (1 δ) K t+1 Rental rate and real interest rate: r k t = p k t p k 1 δ t r t r δ Back 25 / 19

26 LAND Land with dividends: p land t = D t + pland t r t Land that pays a real dividend rules out a secular stagnation Land without dividends: If r > 0, price of land equals its fundamental value If r < 0, price of land is indeterminate and land offers a negative return r Absence of risk premia: No risk premia on land Negative short-term natural rate but positive net return on capital Back 26 / 19

27 Planner s optimality conditions: Implications: DYNAMIC EFFICIENCY C o C m = β (1 + g) (1 α) K α = 1 1 δ 1 + g D (1 + g) + C m g C o = K 1 α L α K ( 1 1 δ ) 1 + g Competitive equilibrium does not necessarily coincide with constrained optimal allocation If r > g, steady state of our model with capital is dynamically efficient Negative natural rate only implies dynamic inefficiency if population growth rate is negative 27 / 19

28 DYNAMIC EFFICIENCY Is dynamic efficiency empirically plausible? Classic study in Abel, Mankiw, Summers and Zeckhauser (1989) says no Revisited in Geerolf (2013) and cannot reject condition for dynamic inefficiency in developed economies today Absence of risk premia: No risk premia on capital in our model Negative short-term natural rate but positive net return on capital Abel et al. (2013) emphasize that low real interest rates not inconsistent with dynamic efficiency Back 28 / 19

29 LINEARIZED DYNAMICS UNDER SYMMETRIC STAGNATION Equilibrium conditions: E t π t+1 = ωs y y t + (1 ω) yt + shocks y t = γ w y t 1 + γ w φπ t yt = γwy t 1 + γ wφπ t Local determinacy condition: 1 + γ w γw ( 1 + sy φ ) < φs y ( ωγ w (1 ω) γw) + γ w + γw Back 29 / 19