Secular stagnation, R&D, public investment and monetary policy: a global-model perspective

We evaluate the global macroeconomic effects of fiscal and monetary policy measures to counterbalance secular stagnation by simulating a five-region New Keynesian model of the world economy, calibrated to the United States (US), the euro area (EA), Japan (JP), China (CH), and the rest of the world (RW). The model includes investment in research and development (R&D) as a factor that affects global growth. Our main findings are as follows. First, a negative efficiency shock to R&D in the main advanced economies partially replicates the observed slowdown in long-term global growth and the decrease in interest rates. Second, in the medium- and long-term, the increase in US public investment favours global growth; in the short-term, it stimulates US economic activity but reduces foreign activity. Third, in the US an accommodative monetary stance, which provokes the crowding-in effect, amplifies the short-term macroeconomic effectiveness of public investment, without inducing additional negative spillovers. Fourth, EA, JP, and CH, by simultaneously increasing public investment and adopting an accommodative monetary policy, counterbalance US short-run negative spillovers and further enhance long-term world growth.