EXPECTATIONS, STAGNATION, AND FISCAL POLICY: A NONLINEAR ANALYSIS

George Evans, Seppo Honkapohja and Kaushik Mitra

International Economic Review, 2022, vol. 63, issue 3, 1397-1425

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.

Date: 2022
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https://doi.org/10.1111/iere.12573

Related works:
Working Paper: Expectations, Stagnation and Fiscal Policy: a Nonlinear Analysis (2022)
Working Paper: Expectations, Stagnation and Fiscal Policy: a Nonlinear Analysis (2020)
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