Stagnant productivity and low unemployment: stuck in a Keynesian equilibrium

Soskice, David and Carlin, Wendy (2018) Stagnant productivity and low unemployment: stuck in a Keynesian equilibrium. Oxford Review of Economic Policy, 34 (1-2). pp. 169-194. ISSN 0266-903X

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Abstract

A major challenge is to build simple intuitive macroeconomic models for policy-makers and professional economists as well as students. A specific contemporary challenge is to account for the prolonged slow growth and stagnant productivity that has followed the post-financial crisis recession, along with low inflation despite low unemployment (notably in the UK). We set out a simple three-equation model, which extends the core model in our two recent books (Carlin and Soskice, 2006, 2015) to one with two equilibria and two associated macroeconomic policy regimes. One is the standard inflation-targeting policy regime with equilibrium associated with central bank inflation targeting through monetary policy. It is joined by a second, Keynesian policy regime and equilibrium, with a zero lower bound (ZLB) in the nominal interest rate and a ZLB in inflation in which only fiscal policy is effective (Ragot, 2015). Our approach is related to the Benigno and Fornaro (2016) Keynesian–Wicksellian model of growth with business cycles. It diverges from New Keynesian models because although we attribute model-consistent expectations to the policy-maker, we do not assume that these are the basis for inflation and growth expectations of workers and firms. We compare our approach to Ravn and Sterk’s related multiple equilibrium New Keynesian model (Ravn and Sterk, 2016).

Item Type:	Article
Official URL:	https://academic.oup.com/oxrep
Additional Information:	© 2018 Oxford University Press
Divisions:	Government
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations; Cycles E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Determination of Interest Rates; Term Structure of Interest Rates E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects) O - Economic Development, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O42 - Monetary Growth Models
Date Deposited:	20 Apr 2018 15:31
Last Modified:	11 Dec 2024 21:36
URI:	http://eprints.lse.ac.uk/id/eprint/87602

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