A Contagious Malady? Open Economy Dimensions of Secular Stagnation

56 Pages Posted: 7 Jun 2016 Last revised: 29 Jun 2016

See all articles by Gauti B. Eggertsson

Gauti B. Eggertsson

Federal Reserve Bank of New York

Neil R Mehrotra

Brown University - Department of Economics

Sanjay R. Singh

University of California, Davis

Larry Summers

Harvard University

Date Written: June 2016

Abstract

Conditions of secular stagnation - low interest rates, below target inflation, and sluggish output growth - characterize much of the global economy. We consider an overlapping generations, open economy model of secular stagnation, and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries as opposed to lower interest rates. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor with output gains in one country coming at the expense of the other. Similarly, we find that competitiveness policies including structural labor market reforms or neomercantilist trade policies are also beggar-thy-neighbor in a global secular stagnation.

Suggested Citation

Eggertsson, Gauti B. and Mehrotra, Neil R and Singh, Sanjay R. and Summers, Larry, A Contagious Malady? Open Economy Dimensions of Secular Stagnation (June 2016). NBER Working Paper No. w22299, Available at SSRN: https://ssrn.com/abstract=2790696

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

Sanjay R. Singh

University of California, Davis ( email )

One Shields Drive
Davis, CA 95616-8578
United States

HOME PAGE: http://ssingh.ucdavis.edu

Larry Summers

Harvard University ( email )

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