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Stagnant productivity and low unemployment: stuck in a Keynesian equilibrium

Carlin, WJ; Soskice, D; (2018) Stagnant productivity and low unemployment: stuck in a Keynesian equilibrium. Oxford Review of Economic Policy , 34 (1-2) pp. 169-194. 10.1093/oxrep/grx062. Green open access

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Abstract

A major challenge is to build simple intuitive macroeconomic models for policy-makers and professional economists as well as students. A specific contemporary challenge is to account for the prolonged slow growth and stagnant productivity that has followed the post-financial crisis recession, along with low inflation despite low unemployment (notably in the UK). We set out a simple three-equation model, which extends the core model in our two recent books (Carlin and Soskice, 2006, 2015) to one with two equilibria and two associated macroeconomic policy regimes. One is the standard inflation-targeting policy regime with equilibrium associated with central bank inflation targeting through monetary policy. It is joined by a second, Keynesian policy regime and equilibrium, with a zero lower bound (ZLB) in the nominal interest rate and a ZLB in inflation in which only fiscal policy is effective (Ragot, 2015). Our approach is related to the Benigno and Fornaro (2016) Keynesian–Wicksellian model of growth with business cycles. It diverges from New Keynesian models because although we attribute model-consistent expectations to the policy-maker, we do not assume that these are the basis for inflation and growth expectations of workers and firms. We compare our approach to Ravn and Sterk’s related multiple equilibrium New Keynesian model (Ravn and Sterk, 2016).

Type: Article
Title: Stagnant productivity and low unemployment: stuck in a Keynesian equilibrium
Open access status: An open access version is available from UCL Discovery
DOI: 10.1093/oxrep/grx062
Publisher version: https://doi.org/10.1093/oxrep/grx060
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: stagnation, liquidity trap, zero lower bound, strategic complementarity, multiple equilibria, inflation-targeting
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10042723
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