Discussion Paper Details

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Title: Stagnation Traps

Author(s): Gianluca Benigno and Luca Fornaro

Publication Date: January 2016

Keyword(s): endogenous growth, growth traps, liquidity traps, multiple equilibria and secular stagnation

Programme Area(s): International Macroeconomics and Finance, Macroeconomics and Growth and Monetary Economics and Fluctuations

Abstract: We provide a Keynesian growth theory in which pessimistic expectations can lead to very persistent, or even permanent, slumps characterized by unemployment and weak growth. We refer to these episodes as stagnation traps, because they consist in the joint occurrence of a liquidity and a growth trap. In a stagnation trap, the central bank is unable to restore full employment because weak growth depresses aggregate demand and pushes the interest rate against the zero lower bound, while growth is weak because low aggregate demand results in low profits, limiting firms' investment in innovation. Policies aiming at restoring growth can successfully lead the economy out of a stagnation trap, thus rationalizing the notion of job creating growth.

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Bibliographic Reference

Benigno, G and Fornaro, L. 2016. 'Stagnation Traps'. London, Centre for Economic Policy Research.