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Capital Accumulation and the Dynamics of secular stagnation

Author

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  • Gilles Le Garrec

    (Observatoire français des conjonctures économiques)

  • Vincent Touze

    (Observatoire français des conjonctures économiques)

Abstract

We characterize the dynamics of secular stagnation as a permanent regime switching from a full employment equilibrium to an underemployment equilibrium. In the latter, the natural interest rate is negative, and the economy is in deáation. Due to the non negativity condition imposed on policy rate, the zero lower bond (ZLB) applies which prevents targeting ináation. The secular stagnation equilibrium is achieved in a standard overlapping generations model with capital accumulation where two market imperfections are introduced: credit rationing and downward nominal wage rigidity. To Ögure out how to escape the secular stagnation trap, we study the impact of various macroeconomic policies. Raising the ináation target is only e§ective if the central bank has enough credibility. By supporting aggregate demand, Öscal policy can help the economy get out of the secular stagnation trap. However, this policy reduces the incentive to accumulate capital: there is a trade-o§ between exiting secular stagnation and depressing potential GDP. Dynamic multi- pliers are upper than one unless the Öscal stimilus is too strong. We also shed light on an asymmetry in the dynamics: recovery takes longer than falling into recession.

Suggested Citation

  • Gilles Le Garrec & Vincent Touze, 2016. "Capital Accumulation and the Dynamics of secular stagnation," Sciences Po publications 2016-17, Sciences Po.
  • Handle: RePEc:spo:wpmain:info:hdl:2441/69n0a0mntc92to9jgrhc3ppj6u
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    More about this item

    Keywords

    Secular stagnation; Capital accumulation; Zero lower Bound;

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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