A Model of Secular Stagnation: Theory and Quantitative Evaluation

90 Pages Posted: 30 Jan 2017

See all articles by Gauti B. Eggertsson

Gauti B. Eggertsson

Federal Reserve Bank of New York

Neil R Mehrotra

Brown University - Department of Economics

Jacob Robbins

Harvard University - Department of Health Policy & Management

Date Written: January 2017

Abstract

This paper formalizes and quantifies the secular stagnation hypothesis, defined as a persistently low or negative natural rate of interest leading to a chronically binding zero lower bound (ZLB). Output-inflation dynamics and policy prescriptions are fundamentally different from those in the standard New Keynesian framework. Using a 56-period quantitative life cycle model, a standard calibration to US data delivers a natural rate ranging from –1:5% to –2%, implying an elevated risk of ZLB episodes for the foreseeable future. We decompose the contribution of demographic and technological factors to the decline in interest rates since 1970 and quantify changes required to restore higher rates.

Suggested Citation

Eggertsson, Gauti B. and Mehrotra, Neil R and Robbins, Jacob, A Model of Secular Stagnation: Theory and Quantitative Evaluation (January 2017). NBER Working Paper No. w23093, Available at SSRN: https://ssrn.com/abstract=2907896

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

Jacob Robbins

Harvard University - Department of Health Policy & Management ( email )

677 Huntington Avenue
Boston, MA 02115
United States

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