Stagnation Traps

Gianluca Benigno and Luca Fornaro

The Review of Economic Studies, 2018, vol. 85, issue 3, 1425-1470

Abstract: We provide a Keynesian growth theory in which pessimistic expectations can lead to very persistent, or even permanent, slumps characterized by high unemployment and weak growth. We refer to these episodes as stagnation traps, because they consist in the joint occurrence of a liquidity and a growth trap. In a stagnation trap, the central bank is unable to restore full employment because weak growth depresses aggregate demand and pushes the policy rate against the zero lower bound, while growth is weak because low aggregate demand results in low profits, limiting firms’ investment in innovation. Aggressive policies aiming at restoring growth, such as subsidies to investment, can successfully lead the economy out of a stagnation trap by generating a regime shift in agents’ growth expectations.

Keywords: Secular stagnation; Liquidity traps; Endogenous growth; Monetary policy; Multiple equilibria; Hysteresis (search for similar items in EconPapers)
JEL-codes: E32 E43 E52 O31 O42 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1093/restud/rdx063 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Stagnation traps (2017)
Working Paper: Stagnation traps (2017)
Working Paper: Stagnation traps (2016)
Working Paper: Stagnation Traps (2016)
Working Paper: Stagnation traps (2016)
Working Paper: Stagnation traps (2016)
Working Paper: Stagnation Traps (2015)
Working Paper: Stagnation Traps (2015)
Working Paper: Stagnation Traps (2015)
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:oup:restud:v:85:y:2018:i:3:p:1425-1470.

Access Statistics for this article

The Review of Economic Studies is currently edited by Thomas Chaney, Xavier d’Haultfoeuille, Andrea Galeotti, Bård Harstad, Nir Jaimovich, Katrine Loken, Elias Papaioannou, Vincent Sterk and Noam Yuchtman

More articles in The Review of Economic Studies from Review of Economic Studies Ltd
Bibliographic data for series maintained by Oxford University Press ().