Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/212363 
Year of Publication: 
2016
Series/Report no.: 
Bank of Finland Research Discussion Papers No. 25/2016
Publisher: 
Bank of Finland, Helsinki
Abstract: 
Stagnation as the new norm and fiscal policy are examined in a New Keynesian model with adaptive learning determining expectations. We impose inflation and consumption lower bounds, which can be relevant when agents are pessimistic. The inflation target is locally stable under learning. Pessimistic initial expectations may sink the economy into steady-state stagnation with deflation. The deflation rate can be near zero for discount factors near one or if credit frictions are present. Following a severe pessimistic expectations shock a large temporary fiscal stimulus is needed to avoid or emerge from stagnation. A modest stimulus is sufficient if implemented early.
JEL: 
E62
D84
E21
E43
Persistent Identifier of the first edition: 
ISBN: 
978-952-323-124-5
Document Type: 
Working Paper

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