Secular Stagnation and Monetary Policy

Ihave been engaged in thinking, writing, provoking, and analyzing around the issue of secular stagnation: the issue of protracted sluggish growth, why it seems to be our experience, and what should be done about it.1 This paper summarizes my current thinking on those topics and reflects on the important limits monetary policy experiences in dealing with secular stagnation.The recent sluggish performance of the economy, both in the United States and particularly abroad, motivates this discussion of secular stagnation.Figure 1 depicts successive estimates of potential GDP and the behavior of actual GDP for the United States.While the Congressional Budget Office (CBO) finds a much lower output gap than it did in 2009, that is wholly the result of downward revisions to its estimate of potential GDP (see Figure 2).Relative to what the CBO thought potential was in 2007, the gap has never been greater.The situation is more negative in Europe, shown in Figure 3, where actual GDP has performed worst and the magnitude of the downward revision has been substantially greater.The contrast between what happened after the fall of 2008 and what happened after the fall of 1929 was a notable macro-economic achievement.Collapse and catastrophe happened after the fall of 1929 with the Great Depression.There was nothing like the Great Depression after 2008, in part because of aggressive actions of the Federal Reserve and the Treasury.That was a bipartisan achievement.Key steps such as the Troubled Asset Relief Program (TARP) were initiated during the Bush administration.Further steps such as the American Recovery and Reinvestment Act took place during the Obama administration.But although the recent policy response to the financial crisis far surpassed that which followed the 1929 crash, twelve years after the acute shock the economy is likely to be in a This article is based on the author's Homer Jones Memorial Lecture delivered at the Federal Reserve