Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/267010 
Year of Publication: 
2021
Series/Report no.: 
Working Paper No. 346
Publisher: 
University of California, Department of Economics, Davis, CA
Abstract: 
Concerns of prolonged stagnation periods with near-zero interest rates and deflation have become widespread in many advanced economies. We build a theoretical framework that rationalizes two theories of low interest rates: expectations-trap and secular stagnation in a unified setting. We analytically derive contrasting policy implications under each hypothesis and identify robust policies that eliminate expectations-trap and reduce the severity of secular stagnation episodes. We provide a quantitative assessment of the Japanese experience from 1998:Q1-2020:Q4. We find evidence favoring the expectations-trap hypothesis and show that equilibrium indeterminacy is essential to distinguish between theories of low interest rates in the data.
Subjects: 
Expectations-driven trap
secular stagnation
zero lower bound
robust policies
JEL: 
E31
E32
E52
Document Type: 
Working Paper

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