A Model of Secular Stagnation

A Quantitative Analysis for an Endowment Economy with Fiscal Policy

Abstract

This paper follows the ideas developed and formulated by Eggertsson, Mehrotra and Robbins of a secular stagnation model in which persistently low or even negative natural rates of interest become a permanent state of the economy. This differs substantially from New Keynesian models which only see negative interest rates as a temporary occurrence. With monetary policy constrained by the zero lower bound, economic policy necessitates a further exploration of fiscal policy. We present a quantitative analysis of an endowment economy OLG model with fiscal policy to illustrate the capabilities of fiscal policy in aiding an economy out of secular stagnation.