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Stagnant productivity and low unemployment: stuck in a Keynesian equilibrium

Wendy Carlin () and David Soskice

No 12369, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A major challenge is to build simple intuitive macroeconomic models for policy-makers and professional economists as well as students. A specific contemporary challenge is to account for the prolonged slow growth and stagnant productivity that has followed the post-financial crisis recession, along with low inflation despite low unemployment (notably in the UK). We set out a simple three-equation model, which extends the core model in our two recent books (Carlin and Soskice, 2006, 2015) to one with two equilibria and two associated macroeconomic policy regimes. One is the standard inflation-targeting policy regime with equilibrium associated with central bank inflation targeting through monetary policy. It is joined by a second, Keynesian policy regime and equilibrium, with a zero lower bound (ZLB) in the nominal interest rate and a ZLB in inflation in which only fiscal policy is effective (Ragot, 2015). Our approach is related to the Benigno and Fornaro (2016) Keynesian–Wicksellian model of growth with business cycles. It diverges from New Keynesian models because although we attribute model-consistent expectations to the policy-maker, we do not assume that these are the basis for inflation and growth expectations of workers and firms. We compare our approach to Ravn and Sterk's related multiple equilibrium New Keynesian model (Ravn and Sterk, 2016).

Keywords: inflation-targeting; liquidity trap; multiple equilibria; Stagnation; strategic complementarity; zero lower bound (search for similar items in EconPapers)
JEL-codes: E32 E43 E52 O42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-pke
Date: 2017-10
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