Secular Stagnation and Low Interest Rates Under the Fear of a Government Debt Crisis

40 Pages Posted: 23 Apr 2020

See all articles by Keiichiro Kobayashi

Keiichiro Kobayashi

Keio University

Kozo Ueda

Waseda University; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA)

Date Written: April 23, 2020

Abstract

In this study, we explain the driving forces behind the secular stagnation associated with a persistent decrease in interest rates. To do so, we employ a model that incorporates a crisis risk triggered by an accumulation of government debt. The model shows that the fear of large-scale taxation on capital and misallocations of capital in future debt crises explains almost half the economic slowdown in Japan over the past two decades. Over the same period, the government bond yield decreases, because the uncertainty in returns on capital makes investing in government bonds becomes less risky than investing in capital.

Keywords: Default, government bond, capital levy, lost decades, bank run

JEL Classification: E32, E62, G18, H12, H63

Suggested Citation

Kobayashi, Keiichiro and Ueda, Kozo, Secular Stagnation and Low Interest Rates Under the Fear of a Government Debt Crisis (April 23, 2020). CAMA Working Paper No. 40/2020, Available at SSRN: https://ssrn.com/abstract=3583298 or http://dx.doi.org/10.2139/ssrn.3583298

Keiichiro Kobayashi

Keio University ( email )

Japan

Kozo Ueda (Contact Author)

Waseda University ( email )

1-104 Totsukamachi, Shinjuku-ku
tokyo, 169-8050
Japan

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA) ( email )

ANU College of Business and Economics
Canberra, Australian Capital Territory 0200
Australia

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