Afternoon Must-Read: Gauti Eggertsson and Neil Mehrotra: A Model of Secular Stagnation

Mark Thoma sends us to Gauti Eggertsson and Neil Mehrotra: A Model of Secular Stagnation: “The Japanese malaise that has by now lasted two decades…

…and has many of the same symptoms as the U.S. Great Depression…. In Summers’ words, we may have found ourselves in a situation in which the natural rate of interest – the short-term real interest rate consistent with full employment – is permanently negative…. There has not, to the best of our knowledge, been any attempt to formally model this idea…. The goal of this paper is to fill this gap…. Successful policy actions include, among others, a permanent increase in inflation and a permanent increase in government spending…. Policies such as committing to keep nominal interest rates low or temporary government spending, however, are less powerful than in models with temporary slumps…