IPP Policy Brief n°73 - July 2021

Understanding Secular Stagnation

IPP Policy Brief n°73

July 2021

Author : Jean-Baptiste Michau

Contacts : jean-baptiste.michau@polytechnique.edu


logo-pdf-minUnderstanding Secular Stagnation



One of the most severe challenges facing Western economies is a structural lack of demand due to population aging. This results in a situation of secular stagnation, characterized by depressed inflation, weak economic growth, and under-employment. This has been the case in Japan for the past 25 years, and should not evolve in the near future. The Eurozone and, to a lesser extent, the U.S. have now been in a similar situation for over a decade. While monetary policy is ineffective, fiscal policy has the potential to prop up demand. This requires implementing a massive stimulus such as to temporarily “overheat” the economy to permanently escape the low inflation trap. As the pandemic comes to an end, many countries across the world are implementing fiscal stimulus packages of unprecedented magnitudes. This offers a unique opportunity to bring stagnation to an end. The recent stimulus measures announced and implemented in the US correspond to such a strategy. The Eurozone, by contrast, has no such plans.

Key points:

  • Over the last few decades, population aging has led to a structural lack of demand, resulting in depressed economic activity.
  • To offest this trend, monetary policy has reduced the interest rate all the way down to 0%, but has now reached a lower bound and cannot further stimulate the economy.
  • Secular stagnation corresponds to a situation with zero interest rate, near zero inflation, and under-employment. Japan has been stuck into stagnation for the last 25 years, the Eurozone and the U.S. since the Great Recession of 2008.
  • Higher inflation induces households to consume now rather than later. The optimal policy therefore consists in raising inflation sufficiently to restore full employment.
  • This can be achieved through a pump-priming fiscal policy that temporarily overheats the economy, such as to kick-start inflationary pressures on wages and on prices.
  • As the Covid pandemic comes to an end, many countries are implementing massive fiscal stimulus packages, which offer a unique opportunity to get out of the low inflation trap.
  • The U.S. seems willing to risk excessive inflation to avoid the Japanese predicament. The Eurozone’s response pales in comparison.

Ce message est également disponible en : French