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Fiscal policy under secular stagnation: An optimal pump-priming strategy

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  • Michau, Jean-Baptiste

Abstract

How can a depressed economy escape a permanent liquidity trap, such as to restore full employment? This can be achieved through a temporary, but massive, fiscal stimulus to overheat the economy such as to raise the inflation anchor. Despite the substantial cost of overheating the economy, this pump-priming policy is typically optimal. The lack of fiscal space cannot prevent the government from pump priming the economy through fiscal policy.

Suggested Citation

  • Michau, Jean-Baptiste, 2025. "Fiscal policy under secular stagnation: An optimal pump-priming strategy," Journal of Economic Dynamics and Control, Elsevier, vol. 175(C).
    • Handle: RePEc:eee:dyncon:v:175:y:2025:i:c:s0165188925000636
    DOI: 10.1016/j.jedc.2025.105097
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    4. Atif Mian & Ludwig Straub & Amir Sufi, 2021. "A Goldilocks Theory of Fiscal Policy," Working Papers 2021-37, Princeton University. Economics Department..

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    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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