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A Contagious Malady? Open Economy Dimensions of Secular Stagnation

Listed author(s):
  • Gauti Eggertsson

    (Brown University)

  • Neil Mehrotra

    (Brown University)

  • Sanjay Singh

    (Brown University)

  • Lawrence Summers

    (Harvard University)

We propose an open economy model of secular stagnation and show how it can be transmitted from one country to another via current account imbalances. While current account surpluses normally lower interest rates in the recipient country, in a secular stagnation, surpluses transmit recessions due to the zero lower bound on nominal interest rates. In general monetary policies and those directed at competitiveness have negative externalities on trading partners in these circumstances, while fiscal policies and those directed at stimulating domestic demand have positive externalities. This, in a positive sense, explains why the world has relied so much on monetary policies relative to fiscal policies in the wake of the financial crisis and in a normative sense points towards the desirability of fiscal policies. Fiscal policies in response to a secular stagnation are self-financing as in De Long and Summers (2012) in our numerical experiments and a one shot increase in debt will raise demand and is fiscally sustainable. While expansionary monetary policy only provides for a possibility of a better outcome without ex- cluding the possibility of continuing secular stagnation appropriate fiscal policy eliminates secular stagnation by directly raising the natural rate of interest as in Eggertsson-Mehrotra (2014).

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Paper provided by Society for Economic Dynamics in its series 2016 Meeting Papers with number 1701.

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Date of creation: 2016
Handle: RePEc:red:sed016:1701
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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