peter praet : is secular stagnation the new economic reality? remarks by mr peter praet, member of the executive board of the european central bank, for the policy panel entitled " how to deal with potential secular stagnation? " at the secular stagnation and growth measurement conference, bank of france, paris, 16 january 2017. * * * the term “ secular stagnation ” was coined by alvin hansen before world war ii. 1 among the driving factors of the slowdown he predicted were limited population growth and lack of innovation. a decade or so later, we had the baby boom and one of the strongest economic expansion the world has ever experienced – in french, “ les trente glorieuses ” started. this experience should certainly invite all of us to be prudent with the concept of “ secular stagnation ”. let ’ s not forget that a similar panel ten years ago would have been discussing “ the great moderation ”. over the past 10 years, euro area growth has been particularly weak, with the level of gdp only having surpassed its pre - crisis peak level in the third quarter of 2015. short - term growth prospects were periodically revised downwards, and recent estimates of euro area potential growth are approximately 1 %, compared to 1. 5 % - 2 % in the pre - crisis period. these developments have raised the question of whether this low growth environment is in fact the new economic reality. central to this debate is whether the slow growth can be attributed to cyclical – and hence ultimately transitory – factors related to the financial crisis, longer - term structural factors, or a combination of both, whereby cyclical factors have over time turned into permanent factors, for example via hysteresis effects. longer - term structural factors have certainly been at play in the euro area. the decline in potential output growth pre - dates the financial crises, in fact going back to the mid - 1990s, and reflects a long - term slowdown in the growth of total factor productivity. this decline went largely unnoticed. to some extent this oversight can be explained by the fact that in the decade leading up to the crisis the overall macroeconomic environment had been stable. remember our debates during the great moderation and all the good reasons that were put forward to explain macroeconomic stability! today we can look back at this period and see the expectation gaps that we could not clearly identify in real - time. in various parts of the euro area, firms ’

even into negative territory. at face value, such estimates are consistent with the secular stagnation hypothesis. but as policymakers, can we really base our actions on such an intangible variable? my answer is no. this is why the ecb has always followed a comprehensive monetary policy strategy, based on two pillars, and has in practice always looked at a broad range of indicators to assess its monetary policy stance. second, policy instruments. proponents of the secular stagnation hypothesis typically argue that a low equilibrium real interest rate makes monetary policy ineffective, since interest rates cannot fall low enough to absorb the excess of saving over investment. and though several central banks have shown the zero lower bound is not, in fact, a constraint to the interest rate instrument, there is an effective lower bound on interest rates, which is probably not too far from zero. so does that mean central banks have reached the limit of their actions? again my answer is no. instead we have used non - standard measures to flatten the term structure of interest rates and lower financing costs in the economy directly. and the ongoing economic recovery is testament to their effectiveness. what this shows is that theoretical constraints can be lifted in practice, because the economy is much more complex than models can capture. third, the relationship of monetary policy with other policy areas. this is the thorniest issue. there is always a risk for a central bank of becoming the only game in town, even though large parts of the growth challenge are clearly beyond its remit. the drivers of long - term growth are innovation, technology diffusion, which is to say, productivity growth. to manage this risk, central banks should always staunchly stick to their mandate. this is the only way for them to do their part effectively while ensuring that the overall policy response remains comprehensive, consistent, well - sequenced and incentives - compatible. 1 this is the full text of remarks delivered in an abridged form in paris on 16 january 2017. 2 / 2 bis central bankers'speeches