 Secular stagnation: Theory and remediesJournal of Economic Theory, 2018, vol. 176, issue C, 552-618 Abstract: To investigate secular stagnation, I add two features to a standard Ramsey model with money: (i) Households have a preference for wealth; (ii) Wages are downward rigid. In this framework, there exists a frictionless neoclassical steady state equilibrium characterized by a low natural real interest rate. In addition, if wages are sufficiently rigid and the natural real interest rate sufficiently low, then there also exists a Keynesian secular stagnation steady state characterized by under-employment, low inflation, and a binding zero lower bound on the nominal interest rate. As wages become more flexible, the Keynesian steady state diverges away from the neoclassical steady state, until wages are so flexible that it ceases to exist. If monetary policy is excessively restrictive, then the secular stagnation steady state is the unique steady state equilibrium of the economy. The optimal policy response to secular stagnation is to move the economy to the neoclassical steady state. This can either be achieved by raising the central bank's inflation ceiling or by taxing wealth and subsidizing investment in physical capital. This optimal tax policy is revenue-neutral. Keywords: Keynesian economics; Liquidity trap; Monetary and fiscal policy; Secular stagnation (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:176:y:2018:i:c:p:552-618 DOI: 10.1016/j.jet.2018.04.011 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
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