Working Paper: CEPR ID: DP11074
Authors: Gianluca Benigno; Luca Fornaro
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.
Keywords: Endogenous growth; Growth traps; Liquidity traps; Multiple equilibria; Secular stagnation
JEL Codes: E32; E43; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| pessimistic expectations (D84) | stagnation traps (D50) |
| stagnation traps (D50) | persistent unemployment (J64) |
| stagnation traps (D50) | weak growth (O41) |
| weak growth (O41) | low aggregate demand (E00) |
| low aggregate demand (E00) | low profits for firms (D22) |
| low profits for firms (D22) | limited investment in innovation (O39) |
| limited investment in innovation (O39) | further weakening of growth (O49) |
| aggregate demand (E00) | productivity growth (O49) |
| policies aimed at restoring growth (E65) | economy out of stagnation trap (E65) |