Corona crisis has increased the risk of stagnation in the euro area

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Title: Corona crisis has increased the risk of stagnation in the euro area
Author: Ikonen, Pasi ; Oinonen, Sami ; Schmöller, Michaela ; Vilmi, Lauri
Organization: Bank of Finland
Series: Bank of Finland. Bulletin
Series volume: 94
Series number: 5/2020
Year of publication: 2020
Publication date: 9.11.2020
Pages: 46-60
Subject (yso): euroalue; inflaatio; korko; tuottavuus; kriisit; talouskasvu; riskit; taloudelliset vaikutukset
Keywords: COVID-19; korona; stagnaatio; hidas inflaatio; hidas talouskasvu; alhaiset korot; inflaatio-odotukset; Japani; Yhdysvallat
Other keywords: low inflation; corona crisis; low productivity growth; low interest rates
Abstract: Stagnation is a period of slow economic growth often characterised by low interest rates and low inflation. It is most commonly associated with the development of the Japanese economy since the early 1990s. In the euro area, the corona crisis together with an already ageing population, diminished productivity growth, and, in places, high levels of debt even before the onset of the current crisis may weaken the economy's ability to recover. There is a danger of the economy slipping into an equilibrium of low interest rates and low inflation, i.e. a liquidity trap. There is also a risk of inflation expectations declining. The policy response in the euro area to the economic outlook weakened by the corona crisis has been swift and decisive. Well-targeted policy measures can mitigate the risk of the economy following an adverse path.
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