Expectations, Stagnation and Fiscal Policy

Seppo Honkapohja (), George Evans and Kaushik Mitra

No 11428, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Stagnation as the new norm and fiscal policy are examined in a New Keynesian model with adaptive learning determining expectations. We impose inflation and consumption lower bounds, which can be relevant when agents are pessimistic. The inflation target is locally stable under learning. Pessimistic initial expectations may sink the economy into steady-state stagnation with deflation. The deflation rate can be near zero for discount factors near one or if credit frictions are present. Following a severe pessimistic expectations shock a large temporary fiscal stimulus is needed to avoid or emerge from stagnation. A modest stimulus is sufficient if implemented early.

Keywords: Stagnation; Deflation; Expectations; Output multiplier; New keynesian model; Adaptive learning; Fiscal policy (search for similar items in EconPapers)
JEL-codes: D84 E21 E43 E62 (search for similar items in EconPapers)
Date: 2016-08
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Expectations, Stagnation and Fiscal Policy (2017)
Working Paper: Expectations, stagnation and fiscal policy (2016)
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