Seminar: Secular stagnation: Theory and remedies

In this seminar a model of secular stagnation is presented (Michau 2018, “Secular Stagnation: Theory and Remedies”, Journal of Economic Theory) and policy remedies for secular stagnation are discussed (tax policy, helicopter drops of money and fiscal policy). Two features are added to a standard Ramsey model with money: (i) Households have a preference for wealth; (ii) Wages are downward rigid. In this framework, there exists a frictionless neoclassical steady state equilibrium characterized by a low natural real interest rate. In addition, if wages are sufficiently rigid and the natural real interest rate sufficiently low, then there also exists a Keynesian secular stagnation steady state characterized by under-employment, low inflation, and a binding zero lower bound on the nominal interest rate.  As wages become more flexible, the Keynesian steady state diverges away from the neoclassical steady state, until wages are so flexible that it ceases to exist. If monetary policy is excessively restrictive, then the secular stagnation steady state is the unique steady state equilibrium of the economy.