Negative Interest Rate Policy to Fight Secular Stagnation: Unfeasible, Ineffective, Irrelevant, or Inadequate?

This paper discusses three explanations for Secular Stagnation: Summers’s demand-side Secular Stagnation Theory, Palley’s Investment Saturation Hypothesis, and Gordon’s supply-side Secular Stagnation Theory. All three involve a judgement on the efficacy of a negative interest rate policy (NIRP) in tackling stagnation: according to the first it is unfeasible, according to the second it is ineffective (and even dangerous), and according to the third it is irrelevant. First, we argue that these theories face the fundamental difficulty constituted by the use of a (negative) natural (or equilibrium) rate of interest. We propose an original critique of the negative equilibrium rate of interest determined by the marginal efficiency of capital. Second, we claim that the negative interest rate policy is an inadequate tool to fight stagnation. While monitoring and fostering financial stability should be a fundamental role of monetary authorities, monetary policy is unable to stimulate growth, whereas fiscal policy is better suited to the task.