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Business and Economics > Investments: Stocks

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Cover IMF Working Papers
What Happens if Central Banks Misdiagnose a Slowdown in Potential Output
Mr. Bas B. Bakker
In the last few decades, real GDP growth and investment in advanced countries have declined in tandem. This slowdown was not the result of weak demand (there has been no shift along the Okun curve), but of a decline in potential output growth (which has shifted the Okun curve to the left). We analyze what happens if central banks mistakenly diagnose the problem as insufficient demand, when it is actually a supply problem. We do this in a real model, in which inflation is not an issue. We show that aggressive central bank action may revive gross investment, but it will not revive net investment or growth. Moreover, low interest rates will lead to an increase in the capital output ratio, a low return on capital and high leverage. We show that these forecasts are in line with what has happened in major advanced countries.
Keywords:
WP; gross investment; cost of capital; Monetary policy; potential output; Solow-Swan; investment; investment rate; capital consumption; GDP growth; potential GDP; capital output ratio; Capital productivity; Production growth; Stocks; Labor force participation; Europe
Cover IMF Working Papers
The Savings Trap and Economic Take-Off
Mr. Atish R. Ghosh
and
Mr. Carlos M. Asilis
We develop an overlapping generations model of a developing economy in which ‘culture’ and technology interact to determine savings, investment and growth. Investment is assumed to involve intermediation or other costs which may, in each period, result in either of two stable equilibria for the savings rate. At the “good” equilibrium, savings and growth are higher than at the “bad” equilibrium, whether the country attains the good or bad equilibrium in any period depends on each individual’s belief about the savings behavior of other agents in the economy. The model implies that fiscal policy or public activities to facilitate private investment can influence saving. In particular, a sustained period of fiscal restraint can shift the economy onto a higher savings and growth path.
Keywords:
WP; rate of return; interest rate; savings rate; savings equilibrium; high-savings pattern; savings trap; savings decision; savings level; Income; Stocks; Overlapping generations models; Real interest rates; Eastern Europe