Secular stagnation, bubbles, fiscal policy, and the introduction of the pill

CEPR Policy Insight No 86

Jason Lu, Coen N Teulings

The long-run decline in the real interest rate, often dubbed Secular Stagnation, can be well explained by the introduction of the contraceptive pill in the developed world. Its implications were particularly marked in Germany, where the cohort born in 1995 is half the size of that born in 1968. This leads to excess savings and a fall in the real interest rate, until just before the retirement of the large pre-pill cohort. Hence, demography, not central bankerís policy is the ultimate cause of the fall in interest rates. Low interest rates will persist for another 15 years. This might lead to bubbles, e.g. in house prices, which would increase financial instability. Sovereign debt should increase to avoid this. In the Eurozone, this runs counter to the Stability Pact. Since Japanís demography leads that of Europe by 15 years, it provides a laboratory for what awaits Europe, though the impact in Europe might be even more severe.