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Navigating Weak Demand and Low Inflation:
Lessons from the US, Japan and Europe
Date:08.17.2023 Author:ZHANG Bin, ZHU He, SHENG Zhongming, ZHANG Jiajia

Abstract: The report examines the Great Depression in the US, as well as periods of low inflation in Japan and the Eurozone. It analyzes the causes of insufficient demand and low inflation, and policies that helped the economies navigate out of low inflation scenarios. Major findings are: first, persistent insufficient demand and low inflation result from the combination of negative shocks, market failures, and ineffective counter-cyclical policies; second, regardless of the causes, both insufficient demand and low inflation will lead to credit contraction, and the key to breaking the impasse lies in restoring credit growth; third, monetary and financial regulatory authorities hold the most potent policy tools to address the problem. Rebuilding the balance between savings and investment and overcoming insufficient demand can only be achieved by a significant reduction in real interest rates.