Claudio Borio and co-authors on secular stagnation and what the real problem is

From VoxEU, with Enisse Kharroubi, Christian Upper, Fabrizio Zampolli:

But what if, in addition to the persistent – but not structural – hole in aggregate demand a financial bust inevitably generates, a key part of the true story has less to do with the level of aggregate demand than with its composition and impact on the structure of supply? What if what some see as a rather disappointing pre-crisis US growth performance despite a strong financial boom was actually disappointing, in part, precisely because of that boom? What if the protracted post-crisis weakness reflects in no small measure the difficulties in correcting the resource misallocations that accumulated during the previous financial boom and emerged once a financial crisis subsequently broke out?

This is indeed what we conclude by examining the experience of 21 advanced economies over the last 40 years (Borio et al. 2015). The hitherto unsuspected villain in this story is the misallocation of resources – in our case, labour – during the credit boom and its long post-crisis shadow. More generally, the findings support the view that the disappointing developments we have been witnessing may be the result of a major financial boom and bust that has left long-lasting scars on the economic tissue (e.g. BIS 2014, Borio 2014, Borio and Disyatat 2014, Rogoff 2015) rather than the reflection of a structural, deep-seated weakness in aggregate demand.

Here is the full article.


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