Working Paper: NBER ID: w23160
Authors: Olivier Blanchard; Guido Lorenzoni; Jean-Paul Lhuillier
Abstract: Since 2010, U.S. GDP growth has been anemic, averaging 2.1% a year, and this despite interest rates very close to zero. Historically, one would have expected such low sustained rates to lead to much stronger demand. They have not. For a while, one could point to plausible culprits, from a weak financial system to fiscal consolidation. But, as time passed, the financial system strengthened, fiscal consolidation came to an end, and still growth did not pick up. We argue that this is due, in large part, not to legacies of the past but to lower optimism about the future, more specifically to downward revisions in forecast potential growth. Put simply, the anticipation of a less bright future is leading to temporarily weaker demand. If our explanation is correct, it has important implications for policy and for forecasts. It may weaken the case for secular stagnation, as it suggests that the need for very low interest rates may be partly temporary.
Keywords: productivity growth; secular stagnation; economic forecasts; demand growth
JEL Codes: E12; E24; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower potential income growth (O49) | consumers revise their permanent income assessments (D15) |
| consumers revise their permanent income assessments (D15) | affects their consumption behavior (D12) |
| lower productivity growth forecasts (O49) | increase in actual unemployment rates (J64) |
| lower expected demand (R22) | reduced investment (G31) |
| current income (E25) | affects both consumption and growth revisions (E20) |
| downward revisions in potential growth forecasts (H68) | unexpected decreases in consumption growth (E20) |