Abstract
Stagnation and fiscal policy are examined in a nonlinear stochastic New-Keynesian model with adaptive learning. There are three steady states. The steady state targeted by policy is locally but not globally stable under learning. A severe pessimistic expectations shock can trap the economy in a stagnation regime, underpinned by a low-level steady state, with falling inflation and output. A large fiscal stimulus may be needed to avoid or emerge from stagnation, and the impacts of forward guidance, credit frictions, central bank credibility, and policy delay are studied. Our model encompasses a wide range of outcomes arising from pessimistic expectations shocks.
| Original language | English |
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| Journal | International Economic Review |
| Early online date | 17 Feb 2022 |
| DOIs | |
| Publication status | E-pub ahead of print - 17 Feb 2022 |
Bibliographical note
Funding Information:This article replaces an earlier paper titled “Expectations, Stagnation and Fiscal Policy” by the same authors (which appeared as Bank of Finland research discussion paper 25/2016 and as CEPR discussion paper 11428). We are grateful for comments received from participants and our discussants of conferences at NYU, ECB, Utrecht, and Bamberg Universities, DNB, Bank of Canada, and many seminars. We thank the Editor, referees, and Chryssi Giannitsarou, Athanasios Orphanides, Stefano Eusepi, Anna Orlik, Marios Angeletos, Jess Benhabib, James Bullard, Ken Kasa, Kevin Lansing, Andrew Levine, Bruce McGough, Bruce Preston, and Paul Romer for their comments. We are grateful to Sami Oinonen and Tomi Kortela for preparation of the data figures. The first author acknowledges support from the National Science Foundation Grant no. SES‐1559209. The second author is grateful for support from the Yrjö Jahnsson Foundation.
Publisher Copyright:
© 2022 The Authors. International Economic Review published by Wiley Periodicals LLC on behalf of the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
ASJC Scopus subject areas
- Economics and Econometrics