Working Paper: NBER ID: w23093
Authors: Gauti B. Eggertsson; Neil R. Mehrotra; Jacob A. Robbins
Abstract: This paper formalizes and quantifies the secular stagnation hypothesis, defined as a persistently low or negative natural rate of interest leading to a chronically binding zero lower bound (ZLB). Output-inflation dynamics and policy prescriptions are fundamentally different from those in the standard New Keynesian framework. Using a 56-period quantitative life cycle model, a standard calibration to US data delivers a natural rate ranging from –1:5% to –2%, implying an elevated risk of ZLB episodes for the foreseeable future. We decompose the contribution of demographic and technological factors to the decline in interest rates since 1970 and quantify changes required to restore higher rates.
Keywords: Secular Stagnation; Natural Rate of Interest; Zero Lower Bound; Fiscal Policy; Monetary Policy
JEL Codes: E31; E32; E5; E52; E58; E6; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demographic factors (J11) | natural rate of interest (E43) |
| aging populations (J11) | supply of savings (E21) |
| low fertility rates (J13) | supply of savings (E21) |
| supply of savings (E21) | natural rate of interest (E43) |
| demographic changes (J11) | interest rates (E43) |
| zero lower bound (E49) | output (C67) |
| zero lower bound (E49) | inflation dynamics (E31) |
| fiscal policy (E62) | secular stagnation equilibrium (D59) |