Inequality, aggregate demand, and secular stagnation
Over the past two years, “secular stagnation” has been widely discussed within the policy community. Supporters of the secular-stagnation hypothesis believe that demand may be permanently below supply capacity, with low interest rates and inflation targets by central banks preventing real interest rates from falling to the point necessary to restore the supply and demand balance. Widening income inequality has been cited as one cause of secular stagnation. This project will develop a theoretical model to illuminate how income inequality affects aggregate income and therefore economic growth. The model has important implications for economic policy, particularly monetary policy.