Secular Stagnation Too Computers
For macroeconomists
Secular stagnation agency unlike things to unlike people, only a mutual motivation is the steady reject inward existent involvement rates since the 1980s. There convey been many explanations for this (some of which I speak over here), in addition to a mutual characteristic is that piece some mechanisms are quite plausible (in detail a reduction inward population growth volition cut existent rates inward most models) individually they create non seem quite enough. It thus appears probable that nosotros could live looking at something amongst multiple causes. So hither is some other possible machinery that tin plough over notice live added to the list, which is the autumn inward the cost of novel investment goods.
Although this link betwixt investment goods prices in addition to secular stagnation has been suggested before, I desire to focus on a novel paper past times Gregory Thwaites of the LSE in addition to Bank of England [1], which explores this resultant inward a consummate model. His newspaper has some similarities to the newspaper past times Eggertsson in addition to Mehrotra that I talked almost inward this post (for instance it uses a 3 current OLG model), only it has much to a greater extent than of a focus on this investment goods cost effect.
One of the really striking features of recent decades has been the relatively tedious growth inward the cost of investment goods compared to the to a greater extent than familiar cost of consumption goods. As Karabarbounis in addition to Neiman (2014) [2] note, this is oft attributed to advances inward information applied scientific discipline in addition to the estimator age. Thwaites extends Karabarbounis in addition to Neiman’s information across countries in addition to time, in addition to shows that this reject inward the cost of investment goods occurs across countries, in addition to did appear to get roughly 1980.
A telephone exchange number is how much firms react to the fact that upper-case missive of the alphabet is becoming cheaper past times substituting upper-case missive of the alphabet for labour. In Karabarbounis in addition to Neiman they react amongst an elasticity of exchange greater than one, in addition to they purpose their analysis to explicate a reject inward the labour share. However, every bit Thwaites notes, at that spot are many studies which propose a less than unit of measurement elasticity of substitution.
To come across the implications of this, consider a really uncomplicated OLG model amongst log consumption in addition to where agents exclusively move inward the start period. This implies that the proportion of income saved is constant. So if the autumn inward the cost of investment goods leads, ceteris paribus, to a autumn inward the value of upper-case missive of the alphabet required past times firms, in addition to then to equate the demand in addition to render for savings existent involvement rates volition fall. (You need an OLG framework here. In the benchmark representative agent model, the existent involvement charge per unit of measurement equals the charge per unit of measurement of fourth dimension preference addition the growth rate.) This is a steady state result, in addition to the newspaper explores the dynamics.
That is the telephone exchange idea. For me, a actually interesting aspect of the newspaper is that it integrates housing into this analysis. If existent involvement rates fall, in addition to for whatever argue the render of housing is fixed, theatre prices volition ascent (see these two posts). This leads to an growth inward gross household debt, because agents borrow from the former to purchase houses. Thwaites’s model shows that this dampens the autumn inward existent involvement rates, because this is an option goal likewise upper-case missive of the alphabet for retirement savings.
I recognised the mechanism, because I had been playing roughly amongst the same resultant when looking at steady state changes inward authorities debt. H5N1 permanent reduction inward the ratio of authorities debt to gross domestic product would inward an OLG model complimentary upward savings for capital, reducing existent involvement rates (as nosotros explored inward this paper for example). But lower existent rates also heighten the demand for housing, which tin plough over notice live an option way of saving for retirement. More generally, whatever the causes of this apparent tendency reject inward existent involvement rates, the implications for the housing marketplace position - in addition to what nosotros recollect of every bit ‘normal’ inward that marketplace position - are probable to live profound.
[2] Karabarbounis, L. in addition to B. Neiman (2014). The global reject of the undertaking share. The Quarterly Journal of Economics 129 (1), 61–103.
No comments