Munich Personal RePEc Archive

Monetary Policy, Fiscal Policy, and Secular Stagnation at the Zero Lower Bound. A View on the Eurozone

Kleczka, Mitja (2015): Monetary Policy, Fiscal Policy, and Secular Stagnation at the Zero Lower Bound. A View on the Eurozone.

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Abstract

This paper delivers a contemporary estimate of the Eurozone’s natural real rate of interest. While it is found that the natural real rate has declined substantially between 1997 and 2015, it has not become negative. Thus, even in the presence of low inflation and nominal interest rates at the zero lower bound, the Eurozone does not face an acute threat of secular stagnation as defined by Lawrence Summers. Similarly, it is deemed unlikely that a number of ‘headwinds’ or a demise of technological growth will lead to a secular decline of the Eurozone’s economic growth. At the same time, it is found that the Eurozone faces a rather profound threat of ‘diversity stagnation’, as large inter-state differences impair the efficiency of its single monetary policy. Combined with the insufficient enforcement of fiscal rules, this erodes the Eurozone’s economic potential as well as its stability. Far-reaching reforms of the monetary and fiscal framework could overcome the detrimental status quo. However, conflicting economic and political incentives among the different member states and governments render the implementation of a necessary reform unlikely.

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