From fighting Great recession to avoiding “Great Stagnation”

A nice speech by Boston Fed head Eric Rosengren.

He says usually Historians dub certain events/persons as Great for huge success. In economics, the connotation is different and usually applied to events with harmful impacts:

I know it’s still early morning, but allow me to start with an observation about economists, historians, and the word “Great.” Historians tend to use “Great” to reflect success, particularly military success that results in territorial expansion – think Alexander the Great or Peter the Great. In economics, “Great” is used quite differently. It’s usually applied to difficult episodes with serious economic consequences – think of the Great Depression or the so-called Great Recession. Often such an episode involves economic policymaking – fiscal, monetary, or otherwise – that contributes to the situation or fails to alleviate it.

I have titled this talk “Acting to Avoid a Great Stagnation” and let me be clear, I do believe the Federal Reserve is taking appropriate and forceful action to help the U.S. avoid a prolonged economic stagnation.

Let me explain the terms. In my view a Great Stagnation – in current times or any other – would be a long episode that generally includes a willingness among policymakers to accept as inevitable, and decline to resist, far-less-than-optimal outcomes. Such outcomes could include higher unemployment, with the potential result that high unemployment could become entrenched as a more permanent feature of the economic landscape.

Rosengren is also one of the Japanese decline experts. So connects US economy with Japan. He says US economy is better placed than Japan because of its policies:

To reiterate, a key difference is that we didn’t hesitate (by years) to take significant actions in the U.S. And when we took actions, they were forceful. And going forward, we also don’t want to make the mistake of retreating at the first, early signs of improvement. Japan’s experience suggests one must continue until improvement is sustainable and will persist.

However, despite these differences there is an important similarity between our situation and Japan’s, as well. Just as Japan has not experienced inflation despite a rapid expansion of their balance sheet, our measure of inflation (the personal consumption expenditure deflator) is currently only 1.3 percent through July despite our balance sheet expanding significantly four years ago (see the bottom chart on Figure 10).

 

Great recession to Great Stagnation to what next?

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