International Finance Discussion Papers (IFDP)
Understanding Persistent Stagnation
Pablo A. Cuba-Borda and Sanjay R. Singh
We theoretically explore long-run stagnation at the zero lower bound in a representative agent framework. We analytically compare expectations-driven stagnation to a secular stagnation episode and find contrasting policy implications for changes in government spending, supply shocks and neo-Fisherian policies. On the other hand, a minimum wage policy is expansionary and robust to the source of stagnation. Using Bayesian methods, we estimate a DSGE model that can accommodate two competing hypotheses of long-run stagnation in Japan. We document that equilibrium selection under indeterminacy matters in accounting for model fit.
Keywords: Expectations-driven trap, secular stagnation, inflation expectations, zero lower bound
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