Stagnation Traps - Banque de France

Stagnation Traps - Banque de France

Stagnation Traps Gianluca Benigno and Luca Fornaro Research question and motivation Can insufficient aggregate demand lead to economic stagnation? ...

209KB Sizes 0 Downloads 5 Views

Recommend Documents

The New Normal - Banque de France
The New Normal: A Sector-Level Perspective on Productivity Trends in Advanced Economies. Vikram Haksar. International Mo

Series level information - Webstat Banque de France
Dataset: Exchange Rates; Frequency: Monthly; Currency: Romanian leu; Currency ... National language title: Cours de chan

Nowcasting global economic growth - Banque de France
WEO (World Economic Outlook) une mesure de PIB mondial souvent .... the annual world GDP growth rate can be explained by

la theorie des anticipations - Banque de France
Mar 14, 2014 - nécessairement la position de la Banque de France. ..... such as, here, an non-synchronicity between end

Banque de France – Federal Reserve Bank of Chicago
François Ortalo-Magné (U. Wis. Madison) and Andrea Prat (LSE). Discussant: Edouard Challe (Ecole Polytechnique). Winners

Reconsidering the economies of scale in banking - Banque de France
May 31, 2017 - research had been unable to find economies of scale in banking beyond a modest size.” (Alan Greenspan,

Missing Growth from Creative Destruction - Banque de France
Jan 20, 2017 - Thus true growth will exceed measured growth whenever the market share of continuing incumbents shrinks o

Non-resident holdings of French CAC 40 - Banque de France
Changes in stock market valuation, although slightly favourable to non-residents, only had a marginal impact on the owne

Stagnation Traps Gianluca Benigno and Luca Fornaro

Research question and motivation Can insufficient aggregate demand lead to economic stagnation? 

Research question goes back to Great Depression



Recent renewed interest due to:



I

Two decades-long slump affecting Japan since early 1990s

I

Slow recoveries from 2008 financial crisis in US and Euro Area

All these episodes featured: I

Long-lasting liquidity traps (i = 0)

I

High unemployment

I

Slowdowns in growth

Discount rate - Japan (1980-2014) Central Bank policy rate 8 7 6

percent

5 4 3 2 1 0 −1 1980

1985

1990

1995

2000

2005

2010

Unemployment - Japan (1980-2014) Unemployment rate 6

percent

5

4

3

2

1 1980

1985

1990

1995

2000

2005

2010

Real GDP/hour worked - Japan (1980-2014) Real GDP/hour worked 7 6

growth rate (%)

5 4 3 2 1 0 −1 1980

1985

1990

1995

2000

2005

2010

Table 1: Japan, United States and Euro area - before/during trap Japan

Policy rate Unemployment rate Growth GDP/hours

United States

Euro area

19811990

19912014

19982007

20082014

19992007

20082014

4.34 2.50 4.13

0.86 4.02 1.63

3.68 4.90 2.23

0.35 7.88 1.18

2.91 8.67 1.20

1.15 10.37 0.76

Note: All the values are expressed in percentage points. Data from IMF International Financial Statistics and OECD.

This paper Keynesian growth framework: standard endogenous growth model (Aghion and Howitt, 1992) augmented with nominal rigidities 

Weak aggregate demand might generate unemployment



Growth driven by investment by profit-maximizing firms

Key results 

Pessimistic expectations can generate stagnation traps



Countercyclical subsidy to investment leads the economy out of stagnation

Model - supply side Firms produce and invest in R&D/innovation 

Market size effect → higher aggregate demand leads to higher profits and higher investment in innovation and productivity growth g = f (L) , f 0 (L) > 0

(GG)

Nominal wage rigidities 

One unit labor endowment → full employment L = 1



Nominal wage rigidities → unemployment possible (L < 1)

Model - demand side 

Households’ demand for consumption and borrowing increasing in growth R = h (g) , h 0 (g) > 0



Central bank sets R to stabilize output around full employment subject to zlb  ¯ R = max RΨ(L), 1 , Ψ0 (L) > 0



(Euler)

Aggregate demand equation: Euler + MP  ¯ h (g) = max RΨ(L), 1

(MP)

(AD)

Two steady states AD GG

growth g

gf

gu

Lu

employment L

1

The role of confidence shocks 



Equilibrium is determined by expectations and sunspots I

Suppose agents expect that growth will be low

I

Low expectations of future income imply low aggregate demand

I

Due to zero lower bound, central bank is not able to lower the interest rate enough to sustain full employment

I

Firms’ profits are low, weak investment in innovation

I

Expectations of weak growth are verified

Pessimistic expectations can give rise to long lasting stagnation traps

Policy implications



Stagnation traps are possible even when monetary policy is run optimally if central bank lacks commitment



Consider a countercyclical subsidy to innovation g = f (L) + s (g) , s 0 (g) < 0



(GG)

If subsidy is strong enough stagnation traps are ruled out

Countercyclical subsidy to innovation AD

GG laissez faire GG with growth subsidy

GG

growth g

gf

gu

Lu

employment L

1

Small subsidy to innovation AD

GG laissez faire GG with growth subsidy

GG

growth g

gf

gu

L u0 L u

employment L

1

Conclusions



We develop a Keynesian growth model in which endogenous growth interacts with the possibility of slumps driven by weak aggregate demand



Inverse of Say’s law: lack of demand creates lack of supply



Pessimistic expectations can generate stagnation traps



Aggressive supply-side policies stimulate demand and drive economy out of stagnation

Thank you!

Real GDP (log) - Japan (1980-2014) Japan 0.4 0.3 0.2 0.1 0 −0.1 −0.2 −0.3 1985

1990

1995

2000

2005

2010

Real GDP - US (1998-2014) United States

0.1

0.05

0

−0.05

−0.1

−0.15 1998

2000

2002

2004

2006

2008

2010

2012

2014

Real GDP - Euro area (1998-2014) Euro area 0.05

0

−0.05

−0.1

−0.15 1998 back

2000

2002

2004

2006

2008

2010

2012

2014

Baseline model AD GG

growth g

gf

gu

Lu

employment L

1

No zero lower bound AD GG

growth g

gf

employment L

1

Exogenous productivity growth AD gf growth g

GG

employment L

1