1. All this buzz about secular stagnation implies the economy was running just fine and now post financial crisis and resulting recession, it is stagnate.
Rob Brenner and others have a different perspective - the capitalist model actually has never worked and stagnation has just been interrupted by weird periods of growth.
2. The Harrod-Domar growth model also sheds light on why there is this stagnation or 'excess capacity' and equally interesting how such a state can persist.
The model assumes for any change in the rate of investment, a change will occur on the demand side and on the supply side. On the demand side the increase in the rate of investment filters through the multiplier and increases the rate of income. On the supply side the increase in the rate of investment causes a change in the rate of potential output. Equilibrium is defined not only as y = potential output but when their rates of change are also equal.
Solving the model we find r must be equal to the given capital ratio times the marginal propensity to save. But if actual growth r is greater than p*s then demand will be greater than capacity and a shortage will ensue causing firms to act in the opposite way of an equilibrating action; they invest more even though they should invest less.
Imposing secular stagnation onto these results we can understand why this stagnation could persist- if the actual rate is smaller than the required rate to utilize all capacity then there will be a capacity surplus and firms will decrease investment when they should invest.
The model demonstrates something we already had intuition about- some investment is needed to correct the deficiency in investment.
No comments:
Post a Comment