Working Paper
Understanding Persistent ZLB: Theory and Assessment
Abstract: We develop a theoretical framework that rationalizes two hypotheses of long-lasting low interest rate episodes: deflationary-expectations-traps and secular stagnation in a unified setting. These hypotheses differ in the sign of the theoretical correlation between inflation and output growth that they imply. Using the data from Japan over 1998:Q1-2019:Q4, we find that the data favor the expectations-trap hypothesis. The superior model fit of the expectations trap relies on its ability to generate the observed negative correlation between inflation and output growth.
Keywords: Expectations-driven trap; secular stagnation; zero lower bound (ZLB);
JEL Classification: E31; E32; E52;
https://doi.org/10.24148/wp2024-03
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Provider: Federal Reserve Bank of San Francisco
Part of Series: Working Paper Series
Publication Date: 2023-12-15
Number: 2024-03