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Jean-Baptiste MICHAU (Ecole Polytechnique) “Fiscal Policy under Secular Stagnation: An Optimal Pump Priming Strategy”

November 30, 12:15 pm - 1:30 pm

Time: 12:15pm – 13:30 pm
Date: 30 th of November 2020

Jean-Baptiste MICHAU (Ecole Polytechnique) “Fiscal Policy under Secular Stagnation: An Optimal Pump Priming Strategy”

Abstract : This paper provides a new perspective on fiscal policy. A permanent depression in aggregate demand results in multiple equilibria: a secular stagnation equilibrium characterized by a binding zero lower bound, low inflation, and underemployment; and a neoclassical equilibrium where inflation is sufficiently high for the zero lower bound to be non-binding at the (very low) natural real interest rate, resulting in full employment. The optimal fiscal policy under secular stagnation consists in moving the economy to the neoclassical equilibrium. This requires a temporary, but massive, amount of government spending to overheat the economy such as to raise the inflation anchor. The lack of fiscal space cannot prevent the government from pump priming the economy through fiscal policy. It may in fact help spur inflation. To keep a tight control over the price level, the government can finance the stimulus through a suffciently long maturity structure of government debt.

Details

Date:
November 30
Time:
12:15 pm - 1:30 pm
Event Categories:
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Organizers

Edouard CHALLE
Julien PRAT