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Stagnation traps

Author

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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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    More about this item

    Keywords

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