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Fiscal Policy under Secular Stagnation: An Optimal Pump Priming Strategy


  • Jean-Baptiste MICHAU

    (Ecole Polytechnique, France)


This paper provides a new perspective on …scal policy. A permanent depression in aggregate demand results in multiple equilibria: a secular stagnation equilibrium characterized by a binding zero lower bound, low in‡ation, and underemployment; and a neoclassical equilibrium where in‡ation is su¢ ciently high for the zero lower bound to be non-binding at the (very low) natural real interest rate, resulting in full employment. The optimal …scal policy under secular stagnation consists in moving the economy to the neoclassical equilibrium. This requires a temporary, but massive, amount of government spending to overheat the economy such as to raise the in‡ation anchor. The lack of …scal space cannot prevent the government from pump priming the economy through …scal policy. It may in fact help spur in‡ation. To keep a tight control over the price level, the government can …nance the stimulus through a sufficiently long maturity structure of government debt.

Suggested Citation

  • Jean-Baptiste MICHAU, 2020. "Fiscal Policy under Secular Stagnation: An Optimal Pump Priming Strategy," Working Papers 2020-14, Center for Research in Economics and Statistics.
  • Handle: RePEc:crs:wpaper:2020-14

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    Cited by:

    1. Jean-Baptiste Michau, 2021. "Understanding Secular Stagnation," Institut des Politiques Publiques hal-03321881, HAL.
    2. Debrun, Xavier & Masuch, Klaus & Ferrero, Guiseppe & Vansteenkiste, Isabel & Ferdinandusse, Marien & von Thadden, Leopold & Hauptmeier, Sebastian & Alloza, Mario & Derouen, Chloé & Bańkowski, Krzyszto, 2021. "Monetary-fiscal policy interactions in the euro area," Occasional Paper Series 273, European Central Bank.
    3. Atif Mian & Ludwig Straub & Amir Sufi, 2021. "A Goldilocks Theory of Fiscal Policy," Working Papers 2021-37, Princeton University. Economics Department..

    More about this item


    Fiscal policy; Liquidity trap; Ponzi scheme; Secular stagnation.;
    All these keywords.

    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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