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Stagnation traps

Benigno, Gianluca and Fornaro, Luca (2016) Stagnation traps. CEP Discussion Paper (1405). Centre for Economic Performance, London School of Economics and Political Science, 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)
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
Sets: Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 09 May 2016 13:57
Last Modified: 11 Mar 2019 00:04
Funders: Economic and Social Research Council, Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/66416

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