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Stagnation traps

Author

Listed:
  • 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.

Suggested Citation

  • Benigno, Gianluca & Fornaro, Luca, 2016. "Stagnation traps," LSE Research Online Documents on Economics 66416, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:66416
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    File URL: https://researchonline.lse.ac.uk/id/eprint/66416/
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    JEL classification:

    • J1 - Labor and Demographic Economics - - Demographic Economics
    • N0 - Economic History - - General

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