Stagnation Regime of the New Keynesian Model and Current US Policy
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Date
2010-10-30
Authors
Evans, George W., 1949-
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon, Dept of Economics
Abstract
In Evans, Guse, and Honkapohja (2008) the intended steady state
is locally but not globally stable under adaptive learning, and unstable
deflationary paths can arise after large pessimistic shocks to
expectations. In the current paper a modified model is presented that
includes a locally stable stagnation regime as a possible outcome arising
from large expectation shocks. Policy implications are examined.
Sufficiently large temporary increases in government spending can dislodge
the economy from the stagnation regime and restore the natural
stabilizing dynamics. More specific policy proposals are presented and
discussed.
Description
25 p.
Keywords
Stagnation (Economics), Fiscal policy, Deflation trap, Monetary policy