Expectations, stagnation and fiscal policy : a nonlinear analysis
Date
08/2022Metadata
Show full item recordAbstract
Stagnation and fiscal policy are examined in a nonlinear stochastic New-Keynesian model with adaptive learning. There are three steady states. The steady state targeted by policy is locally but not globally stable under learning. A severe pessimistic expectations shock can trap the economy in a stagnation regime, underpinned by a low-level steady state, with falling inflation and output. A large fiscal stimulus may be needed to avoid or emerge from stagnation, and the impacts of forward guidance, credit frictions, central bank credibility, and policy delay are studied. Our model encompasses a wide range of outcomes arising from pessimistic expectations shocks.
Citation
Evans , G W , Honkapohja , S & Mitra , K 2022 , ' Expectations, stagnation and fiscal policy : a nonlinear analysis ' , International Economic Review , vol. 63 , no. 3 , pp. 1397-1425 . https://doi.org/10.1111/iere.12573
Publication
International Economic Review
Status
Peer reviewed
ISSN
0020-6598Type
Journal article
Description
Funding: National Science Foundation (Grant Number(s): SES-1559209; Grant recipient(s): GEORGE W. EVAN). Yrjö Jahnssonin Säätiö.Collections
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