Could an economy get stuck in a rational pessimism bubble? The case of Japan

Vo Phuong Mai Le, David Meenagh and A. Patrick Minford

No E2023/13, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: Developed economies have experienced slower growth since the 2008 nancial crisis, creating fears of "secular stagnation." Rational expectations models have forward-looking bubble 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 economic behaviour. Another possibility is a conventional model where productivity growth has simply slowed down for unknown reasons. Nevertheless, a welfare-optimising approach implies scal policy should commit to eliminating the potential sunspot while being prepared to revert to normal policy if in ation 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)
Pages: 61 pages
Date: 2023-05
New Economics Papers: this item is included in nep-dge and nep-fdg
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