Expectations, stagnation and fiscal policy: a nonlinear analysis

George W Evans*, Seppo Honkapohja, Kaushik Mitra

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    4 Citations (Scopus)

    Abstract

    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.

    Original languageEnglish
    Pages (from-to)1397-1425
    Number of pages29
    JournalInternational Economic Review
    Volume63
    Issue number3
    Early online date6 Apr 2022
    DOIs
    Publication statusPublished - Aug 2022

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