In June 1984 he published (with Blanchard) “Perspectives on High World Real Interest Rates”, and concludes:
This analysis leads us to the following conclusions. High real rates are not due to fiscal policy alone. They are probably partly due to a fiscal-monetary mix, and smaller U. S. deficits would, other things equal, bring down interest rates. Interest rates would, therefore, decline either if Europe accepted further depreciation or if the U.S. recovery slowed down so that U. S. monetary policy was not anticipated to tighten further.
Underlying these developments and explaining the performance both of stock markets and of investment is a shift in profitability. This suggests that, were the other factors to disappear, real rates would probably remain higher than in the 1970s.
In 2014 he writes: “Reflections on the ‘New Secular Stagnation Hypothesis’”
The case made here, if valid, is troubling. It suggests that monetary policy as currently structured and operated may have difficulty maintaining a posture of full employment and production at potential, and that if these goals are attained there is likely to be a price paid in terms of financial stability.
Thirty years ago, monetary policy would work to make real rates remain high. Today, monetary policy cannot be loose enough, and if it is it will bring financial instability!
The relevant chart:
One more reason to make monetary policy geared to maintain Nominal Stability!
HT Ryan Avent