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Stagnant productivity and low unemployment: stuck in a Keynesian equilibrium

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  • Wendy Carlin
  • David Soskice

Abstract

A major challenge is to build simple intuitive macroeconomic models for policy-makers and professional economists as well as students. A specific contemporary challenge is to account for the prolonged slow growth and stagnant productivity that has followed the post-financial crisis recession, along with low inflation despite low unemployment (notably in the UK). We set out a simple three-equation model, which extends the core model in our two recent books (Carlin and Soskice, 2006, 2015) to one with two equilibria and two associated macroeconomic policy regimes. One is the standard inflation-targeting policy regime with equilibrium associated with central bank inflation targeting through monetary policy. It is joined by a second, Keynesian policy regime and equilibrium, with a zero lower bound (ZLB) in the nominal interest rate and a ZLB in inflation in which only fiscal policy is effective (Ragot, 2015). Our approach is related to the Benigno and Fornaro (2016) Keynesian–Wicksellian model of growth with business cycles. It diverges from New Keynesian models because although we attribute model-consistent expectations to the policy-maker, we do not assume that these are the basis for inflation and growth expectations of workers and firms. We compare our approach to Ravn and Sterk’s related multiple equilibrium New Keynesian model (Ravn and Sterk, 2016).

Suggested Citation

  • Wendy Carlin & David Soskice, 2018. "Stagnant productivity and low unemployment: stuck in a Keynesian equilibrium," Oxford Review of Economic Policy, Oxford University Press, vol. 34(1-2), pages 169-194.
  • Handle: RePEc:oup:oxford:v:34:y:2018:i:1-2:p:169-194.
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    File URL: http://hdl.handle.net/10.1093/oxrep/grx060
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    References listed on IDEAS

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    1. N. Bloom., 2016. "Fluctuations in uncertainty," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 4.
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    7. Caballero, Ricardo J., 1999. "Aggregate investment," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 12, pages 813-862 Elsevier.
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    Cited by:

    1. Oulton, Nicholas, 2018. "The UK (and Western) productivity puzzle: does Arthur Lewis hold the key?," LSE Research Online Documents on Economics 87394, London School of Economics and Political Science, LSE Library.
    2. Jean-Philippe Bouchaud & Stanislao Gualdi & Marco Tarzia & Francesco Zamponi, 2018. "Optimal inflation target: insights from an agent-based model," Post-Print hal-01768441, HAL.
    3. Bill Martin & Centre for Business Research, 2018. "A Comment on Oulton, "The UK Productivity Puzzle: Does Arthur Lewis Hold the Key?"," Working Papers wp498, Centre for Business Research, University of Cambridge.
    4. Baccaro, Lucio & Pontusson, Jonas, 2018. "Comparative political economy and varieties of macroeconomics," MPIfG Discussion Paper 18/10, Max Planck Institute for the Study of Societies.
    5. repec:zbw:ifweej:201815 is not listed on IDEAS

    More about this item

    Keywords

    stagnation; liquidity trap; zero lower bound; strategic complementarity; multiple equilibria; inflation-targeting;

    JEL classification:

    • 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
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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