Benigno, Gianluca and Fornaro, Luca (2016) Stagnation traps. CEP Discussion Paper (1405). London School of Economics and Political Science. Centre for Economic Performance, London, UK.
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Abstract
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.
| Item Type: | Monograph (Discussion Paper) |
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| Official URL: | http://cep.lse.ac.uk/ |
| Additional Information: | © 2016 The Authors |
| Divisions: | Centre for Economic Performance |
| Subjects: | H Social Sciences > HB Economic Theory H Social Sciences > HC Economic History and Conditions |
| Date Deposited: | 09 May 2016 13:57 |
| Last Modified: | 11 Dec 2024 19:21 |
| Funders: | Economic and Social Research Council, Economic and Social Research Council |
| URI: | http://eprints.lse.ac.uk/id/eprint/66416 |
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