Possible explanations of the low inflation environment and restrained investment activity

Orsolya Csortos and Zoltán Szalai ()
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Zoltán Szalai: Magyar Nemzeti Bank

Financial and Economic Review, 2015, vol. 14, issue 4, 29–56

Abstract: As a result of the crisis that erupted in 2008, economic activity and inflation have remained weak in the developed countries, and signs of slowdown have also been seen in emerging countries that had performed relatively well in the initial years of the crisis. The slow rate of growth and persistently low inflation create new challenges for monetary policy. The correct economic policy answers can only be found by exploring the reasons for this phenomenon. In 2015, the key focus was often on short-term factors such as falling oil prices. Prices of other commodities have shown similar volatility in recent years, implying that short-term inflation surprises are not only being caused by developments in the energy market. At the same time, core inflation indicators excluding food and energy prices were also low, raising the question whether the inflation trends are dominated by medium-term or long-term factors. One possible explanation of the poor performance of the real economy is that in the pre-crisis years, growth was based on significant indebtedness of economic agents, which were then forced to adjust their balance sheets after the asset price bubble burst. This is a process stretching over several years, and it suggest low inflation and growth rates over the medium term as well. In the views of others, the present slow growth is the continuation of a trend lasting several decades that had already started before the crisis and was only interrupted by the crisis and the adjustment. One group of long-term explanations explains the lengthy recovery with real economy factors, including the imbalance between savings and investments (“secular stagnation” and “savings glut” theories). However, more and more people are emphasising the limitations of these real analyses, and explain the restrained investment activities with changes in the financial structure, corporate finance and corporate governance. This paper deals with the reasons for the globally low inflation, which has recently come into focus for many leading economists and international organisations. We summarise the different views and opinions, which – due to the nature of the issue – primarily reflect the considerations of developed countries, but indirectly determine the future of the whole world economy.

Keywords: inflation; economic growth; corporate governance; corporate financing; monetary policy; monetary analysis (search for similar items in EconPapers)
JEL-codes: E31 E43 E44 E52 G32 (search for similar items in EconPapers)
Date: 2015
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