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

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  • George W. Evans

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.

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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Working Paper Series with number 201101.

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Date of creation: 15 Jan 2011
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Handle: RePEc:san:cdmawp:1101

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Keywords: Stagnation; fiscal and monetary policy; deflation trap.;

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