Understanding Persistent Stagnation

Cuba-Borda, Pablo A.; Singh, Sanjay R.

doi:10.17016/IFDP.2019.1243

Working Paper

Understanding Persistent Stagnation

Abstract: We theoretically explore long-run stagnation at the zero lower bound in a representative agent framework. We analytically compare expectations-driven stagnation to a secular stagnation episode and find contrasting policy implications for changes in government spending, supply shocks and neo-Fisherian policies. On the other hand, a minimum wage policy is expansionary and robust to the source of stagnation. Using Bayesian methods, we estimate a DSGE model that can accommodate two competing hypotheses of long-run stagnation in Japan. We document that equilibrium selection under indeterminacy matters in accounting for model fit.

Keywords: Expectations-driven trap; Secular stagnation; Inflation expectations; Zero lower bound;

JEL Classification: E31; E32; E52;

https://doi.org/10.17016/IFDP.2019.1243