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Understanding Persistent ZLB: Theory and Assessment

Author

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  • Pablo Cuba-Borda
  • Sanjay R. Singh

Abstract

We develop a theoretical framework that rationalizes two hypotheses of long-lasting low-interest rate episodes: deflationary-expectations-traps and secular stagnation in a unified setting. These hypotheses differ in the sign of the theoretical correlation between inflation and output growth that they imply. Using the data from Japan over 1998:I–2019:IV, we find that the data favor the expectations-trap hypothesis. The superior model fit of the expectations trap relies on its ability to generate the observed negative correlation between inflation and output growth.

Suggested Citation

  • Pablo Cuba-Borda & Sanjay R. Singh, 2024. "Understanding Persistent ZLB: Theory and Assessment," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(3), pages 389-416, July.
    • Handle: RePEc:aea:aejmac:v:16:y:2024:i:3:p:389-416
    DOI: 10.1257/mac.20210453
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    Cited by:

    1. Michau, Jean-Baptiste, 2025. "Fiscal policy under secular stagnation: An optimal pump-priming strategy," Journal of Economic Dynamics and Control, Elsevier, vol. 175(C).
    2. Bok, Brandyn & Mertens, Thomas M. & Williams, John C., 2025. "Macroeconomic drivers and the pricing of uncertainty, inflation, and bonds," Journal of Financial Economics, Elsevier, vol. 172(C).
    3. Dominik Hecker & Maik Wolters & Maik H. Wolters, 2025. "Nonlinear Estimation of a New Keynesian Model with Endogenous Inflation De-Anchoring," CESifo Working Paper Series 12280, CESifo.
    4. repec:osf:socarx:nxshd_v1 is not listed on IDEAS
    5. Le, Vo Phuong Mai & Meenagh, David & Minford, Patrick, 2025. "Could an economy get stuck on a rational pessimism sunspot path? The case of Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 101(C).
    6. Brzoza-Brzezina, Michał & Galiński, Paweł R. & Makarski, Krzysztof, 2025. "Monetary and fiscal policy in a two-country model with behavioral expectations," Journal of International Money and Finance, Elsevier, vol. 155(C).
    7. Chunbing Cai & Jordan Roulleau-Pasdeloup & Zhongxi Zheng, 2025. "Endogenous Persistence at the Effective Lower Bound," Papers 2501.06473, arXiv.org, revised Sep 2025.
    8. Masuda, Kazuto, 2024. "The Special Theory of Employment, Exchange Rate, and Money With the Focus on Inflation and Technological Progress," SocArXiv nxshd, Center for Open Science.

    More about this item

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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