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The Stagnation Regime of the New Keynesian Model and Current US Policy

George Evans ()

University of Oregon Economics Department Working Papers from University of Oregon Economics Department

Abstract: In Evans, Guse, and Honkapohja (2008) the intended steady state is locally but not globally stable under adaptive learning, and unstable deflationary paths can arise after large pessimistic shocks to expectations. In the current paper a modified model is presented that includes a locally stable stagnation regime as a possible outcome arising from large expectation shocks. Policy implications are examined. Sufficiently large temporary increases in government spending can dislodge the economy from the stagnation regime and restore the natural stabilizing dynamics. More specific policy proposals are presented and discussed.

Keywords: Stagnation; fiscal and monetary policy; deflation trap (search for similar items in EconPapers)
JEL-codes: E63 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2010-10-30
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Working Paper: The Stagnation Regime of the New Keynesian Model and Current US Policy (2011) Downloads
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