Working Paper: NBER ID: w22172
Authors: Gauti B. Eggertsson; Neil R. Mehrotra; Lawrence H. Summers
Abstract: Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth – now characterize much of the global economy. We consider a simple two-country textbook model to examine how capital markets transmit secular stagnation and to study policy externalities across countries. We find capital flows transmit recessions in a world with low interest rates and that policies that trigger current account surpluses are beggar-thy-neighbor. Monetary expansion cannot eliminate a secular stagnation and may have beggar-thy-neighbor effects, while sufficiently large fiscal interventions can eliminate a secular stagnation and carry positive externalities.
Keywords: secular stagnation; capital flows; fiscal policy; monetary policy; open economy
JEL Codes: E31; E52; F3; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Capital flows (F32) | exacerbate recessions (E65) |
| Low interest rate environment (E43) | exacerbate recessions (E65) |
| Zero lower bound (E49) | exacerbate recessions (E65) |
| Capital inflows (F21) | shift aggregate demand curve (E00) |
| shift aggregate demand curve (E00) | necessitate lower real interest rates (E43) |
| Excessive capital inflows (F32) | pull domestic economy into secular stagnation (E65) |
| Policies triggering current account surpluses (F32) | beggar-thy-neighbor effects (F69) |
| Monetary expansion (E49) | worsen situation for trading partners (F10) |
| Large fiscal interventions (E62) | eliminate secular stagnation (E13) |
| Large fiscal interventions (E62) | generate positive externalities (D62) |
| Monetary policy (E52) | negative spillovers (D62) |
| Fiscal policy (E62) | boost demand (J23) |
| Fiscal policy (E62) | increase natural interest rate (E43) |
| Real exchange rate adjustments (F31) | influence trade balances (F14) |