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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Understanding Persistent Stagnation
Pablo Cuba-Borda
Sanjay R. Singh
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.


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Pablo Cuba-Borda & Sanjay R. Singh, Understanding Persistent Stagnation, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1243, 07 Mar 2019.
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Keywords: Expectations-driven trap ; Secular stagnation ; Inflation expectations ; Zero lower bound
DOI: 10.17016/IFDP.2019.1243
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