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Stagnation Traps

Author

Listed:
  • Gianluca Benigno

    (Department of Economics, London School of Economics (LSE)
    Centre for Economic Policy Research (CEPR)
    Centre for Macroeconomics (CFM))

  • Luca Fornaro

    (Centre for Economic Policy Research (CEPR)
    Centre de Recerca en Economia Internacional (CREI) Barcelona Graduate School of Economics (Barcelona GSE)
    Departament d'Economia i Empresa Universitat Pompeu Fabra Barcelona Graduate School of Economics (Barcelona GSE))

Abstract

We provide a Keynesian growth theory in which pessimistic expectations can lead to very persistent, or even permanent, slumps characterized by unemployment and weak growth. We refer to these episodes as stagnation traps, because they consist in the joint occurrence of a liquidity and a growth trap. In a stagnation trap, the central bank is unable to restore full employment because weak growth depresses aggregate demand and pushes the interest rate against the zero lower bound, while growth is weak because low aggregate demand results in low profits, limiting firms' investment in innovation. Policies aiming at restoring growth can successfully lead the economy out of a stagnation trap, thus rationalizing the notion of job creating growth.

Suggested Citation

  • Gianluca Benigno & Luca Fornaro, 2015. "Stagnation Traps," Discussion Papers 1606, Centre for Macroeconomics (CFM), revised Dec 2015.
  • Handle: RePEc:cfm:wpaper:1606
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    More about this item

    Keywords

    Secular Stagnation; Liquidity Traps; Growth Traps; Endogenous Growth; Multiple Equilibria;
    All these keywords.

    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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