A Model of Secular Stagnation

53 Pages Posted: 22 Oct 2014 Last revised: 21 Mar 2021

See all articles by Gauti B. Eggertsson

Gauti B. Eggertsson

Federal Reserve Bank of New York

Neil R Mehrotra

Brown University - Department of Economics

Date Written: October 2014

Abstract

We propose an overlapping generations New Keynesian model in which a permanent (or very persistent) slump is possible without any self-correcting force to full employment. The trigger for the slump is a deleveraging shock, which creates an oversupply of savings. Other forces that work in the same direction and can both create or exacerbate the problem include a drop in population growth, an increase in income inequality, and a fall in the relative price of investment. Our model sheds light on the long persistence of the Japanese crisis, the Great Depression, and the slow recovery out of the Great Recession. It also highlights several implications for policy.

Suggested Citation

Eggertsson, Gauti B. and Mehrotra, Neil R, A Model of Secular Stagnation (October 2014). NBER Working Paper No. w20574, Available at SSRN: https://ssrn.com/abstract=2513147

Gauti B. Eggertsson (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Neil R Mehrotra

Brown University - Department of Economics ( email )

64 Waterman Street
Providence, RI 02912
United States

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