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A Model of Secular Stagnation: Theory and Quantitative Evaluation

  • Gauti B. Eggertsson
  • Neil R. Mehrotra
  • Jacob A. Robbins
American Economic Journal: Macroeconomics
vol. 11, no. 1, January 2019
(pp. 1-48)
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Abstract

This paper formalizes and quantifies the secular stagnation hypothesis, defined as a persistently low or negative natural rate of interest leading to a chronically binding zero lower bound (ZLB). Output-inflation dynamics and policy prescriptions are fundamentally different from those in the standard New Keynesian framework. Using a 56-period quantitative life cycle model, a standard calibration to US data delivers a natural rate ranging from −1.5% to −2%, implying an elevated risk of ZLB episodes for the foreseeable future. We decompose the contribution of demographic and technological factors to the decline in interest rates since 1970 and quantify changes required to restore higher rates.

Citation

Eggertsson, Gauti B., Neil R. Mehrotra, and Jacob A. Robbins. 2019. "A Model of Secular Stagnation: Theory and Quantitative Evaluation." American Economic Journal: Macroeconomics, 11 (1): 1-48. DOI: 10.1257/mac.20170367

Additional Materials

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
  • E23 Macroeconomics: Production
  • E31 Price Level; Inflation; Deflation
  • E32 Business Fluctuations; Cycles
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E52 Monetary Policy
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