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According to economists of neoclassical inspiration, foreign payments imbalances should not cause concern because they lead to a devaluation of the currency which will restore equilibrium in the medium-long run. Recent studies on the effects of devaluation show that this argument is questionable and that redistributive effects tend to depress domestic demand. The growing deficit in foreign payments may therefore be one of the main factors that drove part of the British public to vote to leave the European Union.
An empirical analysis by Brancaccio, Fontana, Lopreite and Realfonzo shows that the ECB is not capable of controlling the nominal income trend and therefore also inflation. The following study is in line with the alternative argument, according to which the real task of the central bank is to regulate the rhythm of insolvencies in the economic system.
The growth of productivity has a positive influence on aggregate demand and, as suggested by the Kaldor-Verdoorn law, growth of demand has a positive effect on productivity. However, this article shows that in cases of stagnant or recessive aggregate demand, to combat the weakening of the economy, the economic literature suggests intervening with expansionary fiscal policies to increase productivity, investment in infrastructure and R&D expenditure.
Although the central banks of the world’s main economies have implemented expansionary monetary policies to bring down interest rates and therefore stimulate investments, the results have not been up to expectations. Monetary policy has not had the desired effects on the real economy, since the aggregate demand remained weak. The inequalities in income distribution and the ageing of population are related to the secular stagnation.