The Stagnation Regime of the New Keynesian Model and Current US Policy
In Evans, Guse, and Honkapohja (2008) the intended steady state is locally but not globally stable under adaptive learning, and unstable deflationary paths can arise after large pessimistic shocks to expectations. In the current paper a modified model is presented that includes a locally stable stagnation regime as a possible outcome arising from large expectation shocks. Policy implications are examined. Sufficiently large temporary increases in government spending can dislodge the economy from the stagnation regime and restore the natural stabilizing dynamics. More specific policy proposals are presented and discussed.
|Date of creation:||15 Jan 2011|
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- Evans, George, 1985. "Bottlenecks and the Phillips Curve: A Disaggregated Keynesian Model of Inflation, Output, and Unemployment," Economic Journal, Royal Economic Society, vol. 95(378), pages 345-357, June.
- Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 507-535, April.
- Reifschneider, David & Willams, John C, 2000. "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 936-966, November.
- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
- David L. Reifschneider & John C. Williams, 2000.
"Three lessons for monetary policy in a low-inflation era,"
Conference Series ; [Proceedings],
Federal Reserve Bank of Boston, pages 936-978.
- David L. Reifschneider & John C. Williams, 1999. "Three lessons for monetary policy in a low inflation era," Finance and Economics Discussion Series 1999-44, Board of Governors of the Federal Reserve System (U.S.).
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