Fiscal policy under secular stagnation: An optimal pump-priming strategy

Jean-Baptiste Michau

Journal of Economic Dynamics and Control, 2025, vol. 175, issue C

Abstract: How can a depressed economy escape a permanent liquidity trap, such as to restore full employment? This can be achieved through a temporary, but massive, fiscal stimulus to overheat the economy such as to raise the inflation anchor. Despite the substantial cost of overheating the economy, this pump-priming policy is typically optimal. The lack of fiscal space cannot prevent the government from pump priming the economy through fiscal policy.

Keywords: Fiscal policy; Liquidity trap; Overheating; Secular stagnation (search for similar items in EconPapers)
JEL-codes: E12 E62 E63 H63 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:175:y:2025:i:c:s0165188925000636

DOI: 10.1016/j.jedc.2025.105097

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