Real interest rates, exchange rates and the ZLB: on Secular Stagnation
Tinbergen Institute Discussion Paper 2018-032/VI
44 Pages Posted: 11 Apr 2018 Last revised: 28 Oct 2018
Date Written: October 28, 2018
What are the drivers of low real rates? What are the implications of the Zero Lower Bound for economic policy? To discuss these questions we introduce a full general equilibrium model of the world economy within a simple (2 period) intertemporal structure. The model is simple enough to allow for full analytical solution yet sufficiently complex to allow us to address the impact of anticipated future productivity slow down, aging, structural reform and fiscal policy on real interest rates if markets clear and on aggregate economic activity if they do not (because of the ZLB). We extend both the equilibrium model and the ZLB variant to a more-goods-per-period structure to address (real) exchange rate policy and the macroeconomic impact of trade tariffs, like Trump's current trade war, on global economic activity.
Keywords: equilibrium real interest rates, aging, productivity change; the ZLB, real exchange rates, import tariffs
JEL Classification: E62, F13, F40, F41, H30
Suggested Citation: Suggested Citation