Working Paper: NBER ID: w20574
Authors: Gauti B. Eggertsson; Neil R. Mehrotra
Abstract: We propose an overlapping generations New Keynesian model in which a permanent (or very persistent) slump is possible without any self-correcting force to full employment. The trigger for the slump is a deleveraging shock, which creates an oversupply of savings. Other forces that work in the same direction and can both create or exacerbate the problem include a drop in population growth, an increase in income inequality, and a fall in the relative price of investment. Our model sheds light on the long persistence of the Japanese crisis, the Great Depression, and the slow recovery out of the Great Recession. It also highlights several implications for policy.
Keywords: Secular Stagnation; Deleveraging Shock; Natural Rate of Interest; Monetary Policy; Fiscal Policy
JEL Codes: E31; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| deleveraging shock (F65) | permanent reduction in the real interest rate (E43) |
| deleveraging shock (F65) | downward shift in the equilibrium real interest rate (E43) |
| slowdown in population growth (J11) | reduced demand for loans (G21) |
| rising income inequality (D31) | affects the supply of savings (E21) |
| deleveraging shock (F65) | new steady state characterized by a negative real interest rate (E43) |
| insufficient inflation targeting from monetary policy (E63) | economy trapped in low output and high unemployment (E24) |