Capital Accumulation and the Dynamics of secular stagnation
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.
Domains
Economics and Finance
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