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Stagnation traps

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  • Benigno, Gianluca
  • Fornaro, Luca

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. JEL Classification: E32, E43, E52, O42

Suggested Citation

  • Benigno, Gianluca & Fornaro, Luca, 2017. "Stagnation traps," Working Paper Series 2038, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20172038
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    Cited by:

    1. Robert E. Hall, 2016. "Macroeconomics of Persistent Slumps," NBER Working Papers 22230, National Bureau of Economic Research, Inc.
    2. Schmidt, Sebastian & Nakata, Taisuke & Hills, Timothy, 2016. "The risky steady state and the interest rate lower bound," Working Paper Series 1913, European Central Bank.
    3. Kilian Huber, 2018. "Disentangling the Effects of a Banking Crisis: Evidence from German Firms and Counties," American Economic Review, American Economic Association, vol. 108(3), pages 868-898, March.
    4. Evans, George W. & Honkapohja, Seppo & Mitra, Kaushik, 2016. "Expectations, Stagnation and Fiscal Policy," CEPR Discussion Papers 11428, C.E.P.R. Discussion Papers.
    5. Vladimir Asriyan & Luca Fornaro & Alberto Martin & Jaume Ventura, 2016. "Monetary policy for a bubbly world," Economics Working Papers 1533, Department of Economics and Business, Universitat Pompeu Fabra.
    6. Eggertsson, Gauti B. & Mehrotra, Neil & Robbins, Jacob A., 2017. "A Model of Secular Stagnation: Theory and Quantitative Evaluation," Working Papers 742, Federal Reserve Bank of Minneapolis.
    7. Philippe Bacchetta & Kenza Benhima & Yannick Kalantzis, 2016. "Money and Capital in a Persistent Liquidity Trap," Cahiers de Recherches Economiques du Département d'Econométrie et d'Economie politique (DEEP) 16.12, Université de Lausanne, Faculté des HEC, DEEP.
    8. Michelis, Andrea De & Iacoviello, Matteo, 2016. "Raising an inflation target: The Japanese experience with Abenomics," European Economic Review, Elsevier, vol. 88(C), pages 67-87.
    9. Ander Perez-Orive & Andrea Caggese, 2017. "Capital Misallocation and Secular Stagnation," 2017 Meeting Papers 382, Society for Economic Dynamics.
    10. Marco Luca Pinchetti, 2017. "Creative Destruction Cycles: Schumpeterian Growth in an Estimated DSGE Model," Working Papers ECARES ECARES 2017-04, ULB -- Universite Libre de Bruxelles.
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    12. Gilles Le Garrec & Vincent Touzé, 2016. "Capital accumulation and the dynamic of secular stagnation," Documents de Travail de l'OFCE 2016-17, Observatoire Francais des Conjonctures Economiques (OFCE).
    13. repec:eee:jetheo:v:176:y:2018:i:c:p:552-618 is not listed on IDEAS
    14. Gauti B. Eggertsson & Neil R. Mehrotra & Sanjay R. Singh & Lawrence H. Summers, 2016. "A Contagious Malady? Open Economy Dimensions of Secular Stagnation," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(4), pages 581-634, November.
    15. Tatiana Kirsanova & Charles Nolan & Maryam Shafiei Deh Abad, 2016. "Deep Recessions and Slow Recoveries," Working Papers 2016_11, Business School - Economics, University of Glasgow.
    16. Michau, Jean-Baptiste, 2018. "Secular stagnation: Theory and remedies," Journal of Economic Theory, Elsevier, vol. 176(C), pages 552-618.

    More about this item

    Keywords

    Endogenous Growth; Growth Traps; Liquidity Traps; Multiple Equilibria; Secular Stagnation;

    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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