The Post-crisis Low Growth Conundrum

Hannah Perregaard

Student thesis: Master thesis

Abstract

This thesis attempts to provide an answer to the following problem statement: “Which factors explain the low growth environment following the Great Recession? What are the implications for policy making?” First, the thesis assesses the strength of the economic recovery from the Great Recession across the G7 and finds that it has been underwhelming compared to other post-WWI recessions. Cross-country differences do however exist; Germany and Canada have recovered relatively well from the Great Recession. A disaggregation of aggregate demand reveals that household and government spending in particular have disappointed relatively to previous recoveries. Second, demand and supply issues are explored by looking at the development in the output gaps and potential output. Canada, France, Italy, and the United States continue to suffer from negative output gaps, while Germany, Japan and the United Kingdom have zero or negligible output gaps. Estimates of potential output losses reveal that both the level and growth of the countries’ supply capacity have been substantially reduced after the Great Recession. Third, a decomposition of potential output per capita shows that the growth in total factor productivity and capital per worker has disappointed relative to the pre-recession period. That total factor productivity was already declining before the recession and that labour inputs are contributing very little provide some support for the secular stagnation hypothesis. Fourth, the validity of the demand side hypotheses of debt overhang and secular stagnation is explored. An investigation of consumption and investment patterns reveals that both households and non-financial corporations are saving more and spending less of their disposable income. By looking at the association between initial debt conditions and changes in corporate and household savings, the thesis finds support for a household debt overhang. Additionally, the long-term trend of declining real interest rates on government bonds indicates that fundamental factors are driving the equilibrium investment and savings, lending credibility to the secular stagnation hypothesis. Current long-term yields may suggest that secular stagnation is more pronounced in France, Germany, Japan and the United Kingdom than in the rest of the G7 countries. Finally, a range of available policy options to address the low growth is explored. At an overall level, the countries with relatively strong fiscal positions could take advantage of their ability to finance investments in infrastructure, education and innovation relatively cheap. In contrast, countries like Italy and Japan may have to rely on budget-neutral structural reforms to avoid future economic stagnation.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2017
Number of pages116
SupervisorsFinn Østrup