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A Model of Secular Stagnation

Author

Listed:
  • Gauti B. Eggertsson

    (Brown University (E-mail: gauti_eggertsson@brown.edu))

  • Neil R. Mehrotra

    (Brown University (E-mail: neil_mehrotra@brown.edu))

Abstract

We propose an overlapping generations New Keynesian model in which a permanent (or very persistent) slump is possible without any self- correcting force to full employment. The trigger for the slump is a deleveraging shock, which creates an oversupply of savings. Other forces that work in the same direction and can both create or exacerbate the problem include a drop in population growth, an increase in income inequality, and a fall in the relative price of investment. Our model sheds light on the long persistence of the Japanese crisis, the Great Depression, and the slow recovery out of the Great Recession. It also highlights several implications for policy.

Suggested Citation

  • Gauti B. Eggertsson & Neil R. Mehrotra, 2015. "A Model of Secular Stagnation," IMES Discussion Paper Series 15-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:15-e-09
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    File URL: http://www.imes.boj.or.jp/research/papers/english/15-E-09.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Secular stagnation; monetary policy; zero lower bound;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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