Stephen Williamson on secular stagnation

Well, Eggertsson and Mehrotra have fleshed out a theory that they think captures what Summers and Krugman are trying to get at. The Eggertsson and Mehrotra chapter in this volume is a summary of a formal academic paper that I discussed in this post. The gist of that blog post is that Eggertsson and Mehrotra – as with Eggertsson/Krugman, which is closely related – focus on the wrong problem. The key inefficiency in their model arises from a credit friction, but they are focusing their attention on the secondary zero-lower-bound inefficiency that the credit friction creates. Basically, the problem is insufficient government debt, and the solution is straightforward.

There is more here, interesting throughout, for those who find this interesting that is.

Addendum: Scott Sumner has some more practical comments.


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