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Abstract:

cover
CEP Discussion Paper
Stagnation Traps
Gianluca Benigno and Luca Fornaro
February 2016
Paper No' CEPDP1405:
Full Paper (pdf)

JEL Classification: E32; E43; E52; O42


Tags: secular stagnation; liquidity traps; growth traps; endogenous growth; multiple equilibria

We provide a Keynesian growth theory in which pessimistic expectations can lead to very persistent, or even permanent, slumps characterized by unemployment and weak growth. We refer to these episodes as stagnation traps, because they consist in the joint occurrence of a liquidity and a growth trap. In a stagnation trap, the central bank is unable to restore full employment because weak growth depresses aggregate demand and pushes the interest rate against the zero lower bound, while growth is weak because low aggregate demand results in low profits, limiting firms' investment in innovation. Policies aiming at restoring growth can successfully lead the economy out of a stagnation trap, thus rationalizing the notion of job creating growth.