Expectations, Stagnation and Fiscal Policy: a Nonlinear Analysis

Seppo Honkapohja, George W. Evans, Kaushik Mitra

Research output: Working paperDiscussion paperScientific

Abstract

Stagnation and fiscal policy are examined in a nonlinear stochastic New-Keynesian model withadaptive learning. There are three steady states. The steady state targeted by policy is locally butnot globally stable under learning. A severe pessimistic expectations shock can trap the economyin a stagnation regime, underpinned by a low-level steady state, with falling inflation and output. Alarge fiscal stimulus may be needed to avoid or emerge from stagnation, and the impacts offorward guidance, credit frictions, central bank credibility and policy delay are studied. Our modelencompasses a wide range of outcomes arising from pessimistic expectations shocks.
Original languageEnglish
Number of pages76
Publication statusPublished - 17 Aug 2020
MoE publication typeD4 Published development or research report or study

Publication series

NameDiscussion Paper Series
No.DP15171

Keywords

  • Stagnation Trap
  • Expectations
  • Fiscal policy
  • Adaptive Learning
  • New-Keynesian model

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