Could an economy get stuck on a rational pessimism sunspot path? The case of Japan

Vo Phuong Mai Le, David Meenagh and Patrick Minford

Journal of International Financial Markets, Institutions and Money, 2025, vol. 101, issue C

Abstract: Developed economies have experienced slower growth since the 2008 financial crisis, creating fears of “secular stagnation.” Rational expectations models have forward-looking sunspot solutions, which could cause this; here we investigate the case of Japan. We show that a New Keynesian model with a weak equilibrium growth path driven by pessimism sunspot belief shocks matches Japanese economic behaviour. Another possibility is a conventional model where productivity growth has simply slowed down for unknown reasons. Nevertheless, a welfare-optimising approach implies fiscal policy should commit to eliminating the potential sunspot while being prepared to revert to normal policy if inflation rises.

Keywords: Secular stagnation; Pessimism sunspot; Indirect inference; DSGE model (search for similar items in EconPapers)
JEL-codes: E32 E5 E6 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:101:y:2025:i:c:s1042443125000320

DOI: 10.1016/j.intfin.2025.102142

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