Summers Says Zero-Rate Boundary a Larger Problem Than Recognized

(Bloomberg) -- Former U.S. Treasury Secretary Lawrence Summers said interest rates in developed countries are more likely to crash back to zero in future downturns than economists have warned, which would make it difficult for monetary policy to dig economies out of recession.

“The widely recognized problem that we’re likely to have difficulty in the future because of the zero lower bound is substantially more serious than one might have previously supposed,” Summers said Saturday at a conference hosted by the Federal Reserve Bank of Boston.

Summers Says Zero-Rate Boundary a Larger Problem Than Recognized

Summers, now a professor at Harvard University, argued that the so-called neutral rate -- the level at which a central bank’s benchmark rate neither stimulates nor restricts an economy’s growth -- has fallen further than most economists have estimated, driven down by a surplus of savings over investments in developed economies around the world.

As much as neutral rates have declined, he said, that phenomenon has been substantially mitigated by fiscal policies, including deficit spending, social insurance programs and policies that provide incentives to borrow.

Many countries will need to consider whether to continue expanding fiscal measures or “to contemplate a world in which neutral real interest rates are going to be much lower than is generally anticipated.”

Governments will have to find new ways of promoting investment to absorb an “incipient large supply of private savings,” Summers said.

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