Changing Dynamics in Household
Behaviour: What do they mean for
inflationary pressures?
Sir Leslie Melville Lecture: A speech delivered to Australia National University
in Canberra, Australia
On 22 November 2016
By Geoff Bascand*, Deputy Governor
Introduction
Thank you for the opportunity to speak to you all today. It's wonderful to be back at the
Australia National University (ANU) and an honour to give this lecture that promotes
discussion between academics and policy practitioners.
Today, I would like to explore how changes in household behaviour- in particular saving1
and debt dynamics - are influencing inflationary pressures.
Nearly ten years on from the start of the global financial crisis (GFC), some advanced
economies are still struggling to reach the "escape velocity" needed to ensure that the
economy grows above trend and generates a path of inflation that is consistent with central
bank inflation targets. Despite extraordinary monetary accommodation in these advanced
economies, economic growth remains disappointingly weak.
Something seems to be different on the demand side of the economy since the GFC, and is
challenging inflation modelling and inflation targeting frameworks. Estimates of the real
neutral interest rate - that is the real interest rate consistent with the economy growing at full
employment and achieving price stability over the medium term - have declined materially.2
Some commentators suggest that nominal interest rates will remain low for years to come.
Views vary as to the nature of the changing dynamics of aggregate demand. Some
economists posit that we are now in an era of "secular stagnation", with a persistent
deficiency in aggregate demand.3 Others point to an overhang from earlier excessive debt
accumulation and suggest that demand is being depressed by a lengthy period of
deleveraging.4 Irrespective of the reasons for the weak demand, several supply-side
arguments point to lower rates of growth in the labour force, innovation, and productivity, and
consequently investment and output growth. In my address, however, I will focus solely on
the demand side of the economy.
While there are many common features to the international picture, there are also notable
differences. In advanced economies, investment has generally been weak at a time when
the household sector's consumption-saving balance has not materially altered.
A different picture, however, emerges in Australasia. As in other advanced economies,
private debt levels rose rapidly in the early part of the twenty-first century, due to strong
household credit growth. But, since the GFC, private debt levels have tended to stabilise
and the household saving rate has increased. This is despite a large increase in wealth
associated with rising house and equity prices.
The path of consumption and the relationship between consumption and wealth is crucial to
the Reserve Bank of Australia's (RBA) and the Reserve Bank of New Zealand's (RBNZ)
assessment of business cycle dynamics and inflation prospects. Indeed, weaker spending
out of wealth than expected is part of the reason why inflation has been lower than forecast
in New Zealand. To what extent heightened saving preferences represent a permanent shift
or a prolonged deleveraging adjustment is uncertain, though some indicators provide
tentative support to the view that it represents a prolonged cyclical correction.
In this address, I will briefly review international demand dynamics, before drawing a New
Zealand and Australian perspective. I will then examine the changes in New Zealand's
saving behaviour and debt dynamics since the GFC, before turning to the implications for the
RBNZ's inflation modelling and forecasting.
Increased saving or lower investment?
Since 2008, OECD economies have grown more slowly relative to previous expansions
(figure 1). Over the past seven years, growth has averaged 1.2 percent compared to 2.6
percent in the decade preceding the GFC. A similar picture emerges when comparing
relative rates of consumption growth. Lower economic growth has been associated with
lower neutral interest rates. The extent to which this reflects lower growth in aggregate
demand or higher saving is unclear, as is the extent to whether it is a prolonged cyclical
phenomenon or a permanent shift in growth rates.5 Summers (2016) believes that long-term
secular forces are at play that raise desired saving and reduce the propensity to invest,
thereby driving down long-run equilibrium interest rates.
Figure 1: Expansions in real GDP (OECD aggregate)6
Index 1975-1981 1982-1990 1991-2001
140 2001-2008 2009-2016
135
130
125
120
115
110
105
100
95
90
1 4 7 10 13 16 19 22 25 28 31 34 37 40
Quarters from trough
Source: OECD.
An increased propensity to save could reflect many factors. For example, stronger
precautionary motives in light of the severe global recession (due to upgraded assessments
of financial and employment risk); demographic shifts towards higher saving households;
greater saving related to population ageing and longer lives; more-binding credit constraints
associated with higher debt levels; rising income inequality; and potentially a downgrading of
future prospects for investment returns and growth.
A lower propensity to invest might reflect lower rates of innovation and productivity growth,
lower expected investment returns,7 less capital-intensive technologies, and structural
change towards less capital-intensive service industries.
An alternative explanation proffered by Rogoff (amongst others) is that our economies are
experiencing a prolonged period of deleveraging (in the public and private sectors), aimed at
winding back excessive debt accumulation from the period preceding the GFC. In this
scenario, national saving would be higher and growth in investment lower (or at least credit-
financed investment) for many years.
What does the evidence suggest?8 For advanced economies as a whole, national saving
has not altered significantly over the last 25 years and, if anything, have declined slightly
(figure 2). The savings-glut hypothesis proposed by Bernanke and others was associated
with the large build-up of savings from China in the mid-2000s, much of which ended up
financing higher United States (US) spending. However, more recently, China's national
saving rate has moderated, while in advanced economies saving rates have recovered
towards pre-GFC levels.
Figure 2: Gross national saving (share of GDP)
% of GDP % of GDP
35
52
50
30
48
46
25
44
42
20
40
38
15
36
China (RHS) Germany Japan US Advanced Economies
10 34
1990 1994 1998 2002 2006 2010 2014
Source: IMF.
The US personal saving data illustrates these developments. Between 1991 and the onset of
the GFC in 2008, the personal saving rate as a share of household disposable income fell by
5.4 percentage points.9 This trend decline coincided with a large rise in house prices and
build-up in household debt. Debt ratios deteriorated due to increased access to new financial
products, the baby-boom generation transitioning towards middle age, and educational
attainment for the population was rising (Dynan and Kohn, 2007). Following the GFC, the
large decline in house prices led to a reassessment of household balance sheets and an
associated cutback in consumption.10
While national saving in the advanced economies has broadly recovered since the crisis, the
weakness in investment has been striking. After being relatively stable as a share of GDP
through the 1990s and early 2000s, the investment ratio tumbled in the GFC and has risen
only marginally since (figure 3). The US investment ratio has recovered only modestly
despite low financing costs, and as at 2016 remains 1.4 percentage points lower than its pre-
crisis average level between 1990 and 2005.
On the face of this data, the reduced propensity to invest appears to have more power than
heightened saving behaviour in explaining the weak aggregate demand story, at least for the
advanced economies grouping.
Figure 3: Total investment (share of GDP)
Index (1990=100) Index (1990=100)
140 140
China Germany Japan US Advanced Economies
130 130
120 120
110 110
100 100
90 90
80 80
70 70
60 60
1990 1994 1998 2002 2006 2010 2014
Source: IMF.
Household and government sector debt has risen significantly as a share of GDP since
1990. A reasonably sharp deleveraging in household debt has been observed in the US
since the GFC, followed by modest deleveraging in the UK and Germany, but this appears to
be an exception to the general pattern observed for advanced economies where debt-to-
GDP has been broadly flat (figure 4). These trends are broadly consistent with slow credit
growth, in part due to tighter financial regulation and the diminished appetite for debt in the
private sector. Bank credit in the private non-financial sector for advanced economies has
barely expanded since 2008, while it grew at an annual rate of 8 percent in the eight years
preceding the crisis.11 Elevated debt levels may have inhibited credit, investment and
consumption growth, but significant deleveraging is not yet apparent in the aggregate data
(Buttliglione, Lane, Reichin and Reinhart, 2014).
Figure 4: Household debt (share of GDP)12
Index (2008=100) Index (2008=100)
140 140
Advanced Economies Canada Germany UK US Euro area Japan
130 130
120 120
110 110
100 100
90 90
80 80
70 70
60 60
50 50
1990 1994 1998 2002 2006 2010 2014
Source: Bank of International Settlements.
Australasian trends
In contrast to some other advanced economies, New Zealand and Australia have
experienced fairly stable investment-to-GDP ratios and uplift in saving, especially by the
household sector.
Relative to international trends, the Australasian investment story has been stronger with
investment ratios now close to their pre-crisis average (figure 5). Both countries benefitted
from large commodity price gains, and Australia experienced an extraordinary mining
investment boom. New Zealand also experienced a surge in residential investment following
the Canterbury earthquake and in response to the acute shortage of housing in Auckland.13
But even beyond these sectoral shocks there are no obvious signs that the propensity to
invest has weakened.
Figure 5: Percentage point deviation in investment and saving from pre-crisis
averages (share of GDP)14
% point Investment National saving
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
-3.0
-3.5
Australia New Zealand Other advanced Euro area G7
economies
Source: IMF.
In Australia and New Zealand, weaker-than-expected demand has come via lower-than-
expected consumption growth relative to income and, in particular, relative to wealth.
Notwithstanding a smaller financial crisis than experienced in many advanced economies,
Australasian households appear to have adopted a new-found prudence.
One indicator of this is the net foreign liability position, which for New Zealand has fallen
from a peak of 84 percent of GDP in March 2009 to around 65 percent of GDP in the 2016
June quarter. This reflects a narrowing current account deficit over the period resulting from
higher national saving. In addition, there was a sharp narrowing in the investment income
deficit (from 6.3 percent to 3.7 percent of GDP) as interest on foreign debt declined. In
Australia, national saving began rising in 2004 and eventually peaked at 24.8 percent of
GDP in 2011, contributing to a narrowing in the current account deficit since the mid-2000s.
National saving has eased slightly in recent years, but the current account deficit and net
foreign liability position have remained broadly stable.
Turning more directly to the household sector, Australia's household saving rate increased
from around zero in 2003 to an average of about 7 percent of disposable income thereafter
(figure 6). New Zealand also saw a recovery in the household saving rate from a trough of
-6.8 percent in 2003 to 2.4 percent in 2012.
Over a longer-term context it is striking that the 1990s and early 2000s were an exceptional
period of low or negative saving. For example, in Australia, the personal saving rate has
averaged about 10 percent since 1960 and was as high as 19 percent in 1973. In New
Zealand, household saving averaged 4 percent of household disposable income from 1987
to 1994, and was then negative for most years until 2010.
Figure 6: Household net saving rate (percent of disposable income)
% %
15 15
New Zealand
Australia
10 10
5 5
0 0
-5 -5
-10 -10
1987 1991 1995 1999 2003 2007 2011 2015
Source: Statistics New Zealand, Australian Bureau of Statistics.
Decomposing changes in household saving
Why has household saving increased? A number of explanations are plausible as I
highlighted earlier. It is not my intention to examine these hypotheses comprehensively
today. But I will point to some promising lines of inquiry by reviewing how different
household groups have behaved before and after the GFC.
The RBA recently examined the rise in the Australian household saving ratio between 2003-
04 and 2009-10 by examining saving behaviour for different household groupings (Finlay
and Price, 2014). They found that the propensity to save rose most for households reliant on
less secure sources of income, or who are more vulnerable to asset price shocks, indicating
a greater degree of risk aversion and thus heightened precautionary motives. University
educated households also increased their propensity to save relative to high school
educated households, which the authors suggested could reflect a downward reassessment
of future income prospects by higher-educated households. Wealthy households and those
with high debt levels displayed an increased propensity to save, reflecting a desire to rebuild
wealth following the asset price shock during the crisis, and a more prudent attitude towards
debt.
We have recently undertaken similar analysis for New Zealand using Household Economic
Survey (HES) data that compares consumption and saving across households at the peak of
the last cycle (2007) and some five years after the recession (2013).15 Whilst the HES
provides a flawed estimate of aggregate household saving relative to national accounts
data,16 it is reasonably consistent in its methodology over time, affording a useful
decomposition of changes in saving patterns.
The HES data shows a smaller increase in the median saving ratio relative to the rise in the
overall level of saving (or the aggregate saving ratio). This appears to be explained by much
lower dissaving among individuals below the median as opposed to higher saving among
those above the median. The saving ratios at the top end of the saving distribution are
largely unchanged (figure 7).
Figure 7: Distribution of the saving ratio (percent of disposable income)
%
%
2007 2013
200 200
100 100
0 0
-100 -100
-200 -200
-300 -300
-400 -400
-500 -500
10 20 30 40 50 60 70 80 90 100
Percentiles of the saving ratio
Source: Statistics New Zealand Household Economic Survey.
Similar to Australia, saving rose much more sharply for higher educated households (those
holding a degree), suggesting a downward assessment of future income prospects, such
that much of the income growth over the period was saved.17 Another parallel with the
Australian study is the significant reduction in dissaving amongst those with the highest debt-
to-income (DTI) ratio (figure 8), supporting the notion of a debt overhang and a desire
amongst such households to lower their debt ratios, or a reduced supply of lending to such
households.
These studies suggest there is tentative evidence of a recent shift in saving behaviour in
Australasia owing to pessimism around income growth and the negative shock to wealth
emanating from the GFC. The former would suggest a more enduring change, while the
latter is more consistent with a prolonged cyclical adjustment.
In both countries, there is no obvious sign that ageing demographics (i.e. an increasing
concentration of middle-aged households with higher saving rates) had a strong influence
over the change in saving behaviour during the period. When adjusted for changes in the
age composition of households, the aggregate saving ratio in 2013 was only marginally
lower than the unadjusted rate, implying that most of the (large increase) was due to
economic factors.18 Correspondingly, the increase in the saving rate was smaller amongst
the 50-64 year old age cohort than it was for the 30-49 cohort or the 65+ group.
Figure 8: Saving ratio by DTI quartile (percent of disposable income)19
%
2007 2013
35
30
25
20
15
10
5
0
-5
-10
-15
No debt Quartile 1 Quartile 2 Quartile 3 Quartile 4
Source: Statistics New Zealand Household Economic Survey.
Consumption and wealth
In absolute terms, real consumption growth has not been noticeably weak since the crisis,
with annual real consumption growth in both countries similar to its long-term average of
around 2.5 percent. However, population growth has been rapid and thus real consumption
per capita has grown by only 1.2 percent and 0.8 percent per annum on average since 2008
in New Zealand and Australia respectively (figure 9), well below its long-term average.
Moreover, this modest per capita consumption growth has occurred when wealth, namely
housing wealth, has been rising rapidly.
Figure 9: Consumption per capita (annual growth, percent)20
APC % APC %
6 6
4 4
2 2
0 0
-2 -2
-4 -4
New Zealand Australia New Zealand (average) Australia (average)
-6 -6
1990 1994 1998 2002 2006 2010 2014
Source: Statistics New Zealand, Haver Analytics.
In the early 2000s, rapid increases in housing wealth were associated with strong growth in
credit and consumption. A number of analyses focused on the mechanism of "housing
equity withdrawal" whereby households either borrowed against rising housing wealth or
sold down to realise the gains and potentially to finance general consumption.21 Equity
withdrawal represents one mechanism for dissaving and, for New Zealand, this dynamic can
be observed in figure 10.
It is clear that net equity withdrawal from housing wealth has so far been confined to the
early to mid-2000s, which coincided with strong household consumption growth and a fall in
the household saving rate. Although there has been a large rise in housing wealth in New
Zealand and associated credit expansion since 2013, equity withdrawal has not eventuated
according to our measure. The introduction of loan-to-value restrictions for housing loans
since 2013 has likely played a part in offsetting credit growth related to the resurgence in
housing market activity. Likewise in Australia, housing equity withdrawal was only a
phenomenon that occurred in the early to mid-2000s (Kent, 2015).
Figure 10: Housing equity withdrawal (percent of disposable income)22
% (inverted) %
-20 20
-10 10
Injection
0 0
Withdrawal
10 -10
Housing investment (RHS)
Housing equity withdrawal
Change in mortgage debt plus capital grants
20
1992 1996 2000 2004 2008 2012 2016-20
Source: RBNZ, Statistics New Zealand, Housing New Zealand, REINZ.
The reduced tendency to take on debt secured against the rise in the value of housing
wealth has meant that we have not witnessed a rise in household indebtedness to quite the
same extent that occurred prior to the crisis - at least not until very recently. New Zealand
household debt rose from 60 percent of household disposable income in 1990 to 100
percent in 2000 and 160 percent in 2008 (figure 11). Post GFC, it then declined modestly in
relation to income but has risen again recently, reaching 165 percent of household income in
June 2016. Australia has exhibited a similar but slightly higher household debt track. In both
countries, the ratios to income have been affected by commodity price movements, initially
favourably and then negatively by lowering entrepreneurial incomes. The ratios to wealth are
less affected.
Figure 11: Household debt and wealth
ratio
% of disposable income
200 0.26
New Zealand household debt
Australia household debt
180
0.24
New Zealand debt-to-wealth ratio (RHS)
Australia debt-to-wealth ratio (RHS)
160
0.22
140
0.20
120
0.18
100
0.16
80
0.14
60
40 0.12
1990 1994 1998 2002 2006 2010 2014
Source: RBNZ, Haver Analytics.
What might we infer from this broad stabilisation in debt levels for consumption and
aggregate demand relative to the period leading up to the GFC? On its own, it doesn't
portend a significant tendency towards deleveraging. On the other hand, given the very large
house price and wealth movements observed, the increase in household debt appears more
modest relative to the previous cycle. This is consistent with the observed increase in
saving, in part indicating greater caution on the behalf of households. Even when compared
with financial wealth alone, household debt declined after the GFC, only increasing very
recently.
Undoubtedly, financial liberalisation and persistently lower nominal interest rates have
supported greater debt accumulation, and this appears a marked phenomenon of the
1990s-2000s. The trend in debt levels appears to have plateaued, although the very recent
observations make this less clear (household credit growth ran at 8.5 percent annually in the
three months to August 2016).
Nevertheless, the concern from a financial stability viewpoint is a high concentration of debt
in the housing market, particularly when house prices are significantly over-stretched against
conventional metrics, such as income. High and rising debt levels amongst households
leave them increasingly vulnerable to a deterioration in economic conditions or normalisation
of currently-low mortgage rates.
To assess more rigorously whether the household sector has exhibited lower consumption
out of wealth than it did during the "excessive" 2000s, we have undertaken some updated
econometric modelling.23 The new work includes improved measures of household wealth
and data since the GFC. We estimate the long-run per-capita relationship between the level
of consumption and the levels of housing and financial wealth and income from 1986 to
2016, and then examine the estimates for stability (or structural change).24
The relationship is estimated using a split sample before and after 2005 where the housing
market and housing equity withdrawal was near its peak. The parameter on income and
housing fell by 32 percent and 50 percent respectively since 2005, while the parameter on
financial wealth increased25. This implies that for any given increase in income or housing
wealth, consumption increases by less, indicating more cautious consumer behaviour since
the mid-2000s.26 The change in behaviour may reflect a reassessment of expected future
capital gains from different forms of wealth following the crisis, particularly given heightened
uncertainty in the housing market, and greater precaution about the stability or durability of
income growth.
How has the increase in saving affected inflation and monetary policy?
In the standard New Keynesian model, monetary policy responds to shocks that affect
inflation by setting interest rates to influence the gap between actual economic activity and
its long run, sustainable level. When the level of output is below potential and inflation is
falling, as it is currently for most advanced economies,27 a reduction in interest rates
accelerates investment and consumption, bringing forward spending from future periods to
raise output.
This orthodoxy assumes that current demand conditions and real interest rates are low for
temporary reasons rather than reflecting any long-term structural shift in demand or
productivity growth that would deter consumers and investors from responding to lower
policy-induced interest rates. Strong forms of the secular stagnation hypothesis would argue
that an interest rate adjustment is ineffective in inducing an inter-temporal shift in demand
when consumers and investors anticipate, let alone experience, near-zero long-run interest
rates. A weaker form would acknowledge that the neutral real interest rate has fallen
transitorily, requiring a lower policy rate than previously - a complication for economies close
to or at the zero lower bound.
In New Zealand, there are a couple of reasons why the secular stagnation hypothesis
appears unsupported. Potential output growth has substantially recovered from cyclical lows
and has not inhibited actual GDP growth to the extent that it has in many other advanced
economies. In saying that, potential output growth has still been slower in the current cycle
relative to the previous two (figure 12), consistent with some reduction in the neutral interest
rate. This is largely due to a much weaker contribution from total factor productivity and
growth in the capital stock relative to the past two cycles. Much of the improvement in
potential GDP in the current cycle is accounted for by the growth in labour supply owing to
greater labour force participation and high net immigration. New Zealand is not currently
exhibiting signs of a demographic slowdown that is besetting many advanced economies
(population growth in the year to June 2016 was 2.1 percent).
Figure 12: Contribution to annual potential GDP growth in recent business cycles
%
%
4.5 4.5
1991-97 cycle 1998-07 cycle Current cycle
4.0 4.0
3.5 3.5
3.0 3.0
Total factor
2.5 2.5
productivity
2.0 2.0
1.5 1.5
Labour
1.0 1.0
Capital
0.5 0.5
0.0 0.0
1991 1995 1999 2003 2007 2011 2015
Source: RBNZ.
Secondly, there is no strong evidence to suggest that aggregate demand growth is less
responsive to interest rate adjustments.28 The stimulus from low interest rates appears to be
supporting house prices and construction sector activity via residential investment in line with
previous cycles (even after accounting for the Canterbury earthquake
reconstruction).29 Construction sector activity continues to have a strong influence on the
output gap. Although consumption growth per capita has been weaker than projected since
2013, this is partly explained by exaggerated expectations rooted in the housing cycle of the
early 2000s. We have observed a lower propensity to consume out of housing wealth and an
increase in household saving to more moderate levels since the GFC. With hindsight, it
appears over-optmistic to have extrapolated the experience of the 1990s and early 2000s
when debt accumulation and consumption out of wealth was exorbitant.
As we have explained elsewhere (McDermott, 2016), New Zealand's very low inflation has
reflected negative traded goods inflation over the past 5 years. Non-tradables inflation has
been slightly lower than expected, largely due to more rapid growth in supply capacity (and
especially labour supply) than projected. That said, projections of demand arising from
historical estimates of consumption from wealth have been over-optimistic, contributing to
downward revisions to forecasts of the output gap. Weaker spending than expected out of
wealth is part of the reason why inflation has been lower than forecast. We have been
gradually incorporating the weaker relationship between consumption and housing wealth in
our projections in recent Monetary Policy Statements, as our understanding of household
behaviour has improved.
Conclusion
A number of hypotheses are available to help explain the persistently low economic growth
in the advanced economies since the GFC. Secular stagnation in aggregate demand
associated with excess saving and a long-term decline in the real neutral rate of interest is
favoured by some. Prolonged - but nonetheless temporary - adjustment to debt overhang
is an alternative proposition.
In my speech today, I've contrasted Australian and New Zealand debt and household
dynamics with those observed in other advanced economies. Since the GFC, Australasia
has witnessed a moderation in debt accumulation, a return to historical (pre-2000) saving
behaviour, and steady output growth. Saving appears to have risen more sharply amongst
the most heavily-indebted households. While house price inflation has been strong and
housing credit growth robust, this appears to reflect portfolio adjustment - an asset price
response to low interest rates - and rapid population growth. This cycle has not seen the
pattern of equity withdrawal that characterised the excessive growth in leverage of the early
2000s. Modelling suggests that the elasticity of household spending in response to housing
wealth has moderated since 2005.
Overall, the developments in Australia and New Zealand are more consistent with a debt
overhang hypothesis, a la Rogoff, than secular stagnation, a la Summers. Moreover, rather
than indicating a new low-growth paradigm, they tend to imply that extrapolations of high
growth expectations from the 2000s were misplaced. High investment and consumption
growth rooted in low world interest rates generated by increased savings primarily from
Asian countries, and especially China, temporarily boosted growth and asset markets. In
Australasia, the current outlook looks a lot like that which prevailed before the 2000s. In
other advanced economies, weak investment growth coupled with a disappointing expansion
in the supply side of the economy points to a world more consistent with lower long-term
growth expectations.
We have been taking into account the change in household behaviour in our modelling of
inflation and our policy settings. Allowing for the increase we have seen, the links between
interest rates, output and inflation appear stable. Nonetheless we will be attentive that such
developments are not foreshadowing any greater or longer term change in household
preferences. Currently, we are projecting per-capita consumption growth to improve and
provide an impetus to output growth. The acceleration is modest compared to the previous
cycle as household saving is expected to remain positive over the forecast horizon. Despite
robust domestic growth, slow growth in many other advanced economies suggests that
global disinflationary pressures will continue to act as a headwind as we endeavour to
deliver domestic inflationary outcomes consistent with the midpoint of our target band.
*
I am very grateful to Martin Wong for his considerable help in the preparation of this address. I also wish to
acknowledge Hayden Skilling for his research assistance on the household saving decomposition, and other
colleagues for their comments on earlier drafts.
1
'Saving' in this speech refers to the national accounts definition of income less expenditure.
2
Holston, Laubach and Williams (2016)
3
Summers (2013; 2016)
4
Reinhart and Rogoff (2010); Lo and Rogoff (2015)
5
Estimates for potential growth in advanced economies for the period 2016-2021 have fallen by 0.4 percentage
points over the past two years, reflecting both lower factor growth and lower total factor productivity growth (IMF,
2016).
6
The expansions correspond to periods following global recessions, as identified by IMF (2009), while also
including the dot-com crash of 2001 that coincided with mild recessions in many advanced economies.
7
Investment profitability appears to have declined since the crisis and the spread between equity and sovereign
bond returns has widened, implying rising risk premia (IMF, 2014).
8
Rachel and Smith (2015) provide a comprehensive exposition of the multiple hypotheses for the decline in the
global long-run real interest rate through shifts in the saving and investment schedules, generally treating the
changes as enduring. They evaluate the estimated 450 basis point fall in the long-run real rate of interest since
the 1980s with 100 basis points due to lower trend growth, 140 basis points through reduced investment demand
and 160 basis points through shifts towards higher saving. They observe that in advanced economies lower
investment demand appears to play a larger role, while in emerging market economies the shift upwards in
saving preferences is larger.
9
Source: OECD.
10
Kaplan, Mitman and Violante (2016) estimates that a 30 percent decline in house prices was reflected in a 3.1
percent decline in nondurables consumption from 2007 to 2011. Kaplan et al. (2016) find no effect of initial debt
levels on consumption.
11
Source: Bank of International Settlements.
12
We focus on changes in the household debt-to-GDP ratio rather than the level given measurement and
institutional differences as discussed in Hunt (2014).
13
The share of construction investment relative to potential output in New Zealand has increased by 3
percentage points since the crisis.
14
Other advanced economies include: Australia, Czech Republic, Denmark, Hong Kong (SAR), Iceland, Israel,
Korea, New Zealand, Norway, Singapore, San Marino, Sweden, Switzerland, Taiwan (Province of China). The
pre-crisis period is 1990 to 2005.
15
Access to the data used in this