EconPapers    
Economics at your fingertips  
 

Expectations, Stagnation and Fiscal Policy

George Evans (), Seppo Honkapohja () 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: Adaptive Learning; Deflation; Expectations; Fiscal policy; New Keynesian Model; Output Multiplier; Stagnation (search for similar items in EconPapers)
JEL-codes: D84 E21 E43 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-pbe
Date: 2016-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11428 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Expectations, Stagnation and Fiscal Policy (2017) Downloads
Working Paper: Expectations, stagnation and fiscal policy (2016) Downloads
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:cpr:ceprdp:11428

Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=11428

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

 
Page updated 2019-12-02
Handle: RePEc:cpr:ceprdp:11428