Open Economy Secular Stagnation and Financial Integration

Jean-Baptiste Michau

No 2021-19, Working Papers from Center for Research in Economics and Statistics

Abstract: What is the optimal policy response to secular stagnation within a small open economy? Secular stagnation is characterized by a persistent lack of demand, resulting in under-employment. Within a small open economy, the degree of fi nancial integration determines the nature of the secular stagnation equilibrium. Under perfect capital mobility, stagnation is due to downward nominal wage rigidities; while under financial autarky, it is due to an excessively high real interest rate. I characterize the planners optimal allocation of resources and solve for the tax policy that implements it within a stagnating economy. Under perfect fi nancial integration, payroll taxes should be falling and labor income taxes rising such as to relax the downward nominal wage rigidity; while under fi nancial autarky, the opposite policy should be implemented such as to generate inflation. Alternatively, full employment can be achieved by setting a sufficiently inflation target and by relying on an exchange rate policy to import inflation from abroad. Policy options are more limited under a fixed exchange rate regime, where effciency can either be reached through a coordinated policy response or by abandoning the peg.

Keywords: Financial integration; Liquidity trap; Secular stagnation (search for similar items in EconPapers)
JEL-codes: E31 E63 F38 F41 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2021-11-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://crest.science/RePEc/wpstorage/2021-19.pdf CREST working paper version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:crs:wpaper:2021-19

Access Statistics for this paper

More papers in Working Papers from Center for Research in Economics and Statistics Contact information at EDIRC.
Bibliographic data for series maintained by Secretariat General () and Murielle Jules Maintainer-Email : murielle.jules@ensae.Fr.