Understanding Persistent ZLB: Theory and Assessment

Pablo Cuba-Borda and Sanjay Singh

No 346, Working Papers from University of California, Davis, Department of Economics

Abstract: Concerns of prolonged stagnation periods with near-zero interest rates and deflation have become widespread in many advanced economies. We build a theoretical framework that rationalizes two theories of low interest rates: expectations-trap and secular stagnation in a unified setting. We analytically derive contrasting policy implications under each hypothesis and identify robust policies that eliminate expectations-trap and reduce the severity of secular stagnation episodes. We provide a quantitative assessment of the Japanese experience from 1998:Q1-2020:Q4. We find evidence favoring the expectations-trap hypothesis and show that equilibrium indeterminacy is essential to distinguish between theories of low interest rates in the data.

Keywords: Expectations-driven trap; secular stagnation; zero lower bound; robust policies. (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 (search for similar items in EconPapers)
Pages: 72
Date: 2022-01-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Understanding Persistent ZLB: Theory and Assessment (2024)
Working Paper: Understanding Persistent ZLB: Theory and Assessment (2023)
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