Working Paper: NBER ID: w26791
Authors: Narayana R. Kocherlakota
Abstract: In the 21st century, many key macroeconomic variables in the developed world have been persistently low, including inflation, output, growth, interest rates (both real and nominal), and labor share. I consider a class of standard representative agent rational expectations models in which fundamentals are deterministic and constant over time. I show that for any level of nominal frictions (no matter how small) and for any monetary policy rule (regardless of how active), there is a large set of stochastic equilibria that exhibit permanently low inflation, low output, low labor share, and low nominal interest rates. If the Phillips curve is sufficiently flat, then these equilibria also exhibit low growth and real interest rates.
Keywords: macroeconomics; nominal frictions; inflation; output; monetary policy
JEL Codes: E12; E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| nominal frictions (E39) | low inflation (E31) |
| nominal frictions (E39) | low output (E23) |
| nominal frictions (E39) | low labor share (D33) |
| nominal frictions (E39) | low nominal interest rates (E43) |
| any monetary policy rule (E52) | multitude of stochastic equilibria (C62) |
| multitude of stochastic equilibria (C62) | low inflation (E31) |
| multitude of stochastic equilibria (C62) | low output (E23) |
| multitude of stochastic equilibria (C62) | low labor share (D33) |
| multitude of stochastic equilibria (C62) | low nominal interest rates (E43) |
| firm exit (G33) | ceiling on output (E23) |