Capital accumulation and the dynamic of secular stagnation

Gilles Le Garrec () and Vincent Touzé

No 2016-17, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

Abstract: We characterize the dynamics of secular stagnation as a permanent regime switching from a full employment equilibrium to an underemployment equilibrium. In the latter, the natural interest rate is negative, and the economy is in deáation. Due to the non negativity condition imposed on policy rate, the zero lower bond (ZLB) applies which prevents targeting ináation. The secular stagnation equilibrium is achieved in a standard overlapping generations model with capital accumulation where two market imperfections are introduced: credit rationing and downward nominal wage rigidity. To Ögure out how to escape the secular stagnation trap, we study the impact of various macroeconomic policies. Raising the ináation target is only e§ective if the central bank has enough credibility. By supporting aggregate demand, Öscal policy can help the economy get out of the secular stagnation trap. However, this policy reduces the incentive to accumulate capital: there is a trade-o§ between exiting secular stagnation and depressing potential GDP. Dynamic multi- pliers are upper than one unless the Öscal stimilus is too strong. We also shed light on an asymmetry in the dynamics: recovery takes longer than falling into recession.

Keywords: Secular stagnation; Capital accumulation; Zero lower bound (search for similar items in EconPapers)
JEL-codes: D91 E31 E52 (search for similar items in EconPapers)
Date: 2016-06
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Capital Accumulation and the Dynamics of secular stagnation (2016)
Working Paper: Capital Accumulation and the Dynamics of secular stagnation (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:fce:doctra:1617

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