Embedded Files
Date de publication : 25 mars 2017 23:41:37
Abstract: This paper relies on a Ramsey model with money to over a simple theory of secular stagnation. The permanent failure of the economy to produce at full capacity results from three features: (i) An inflation ceiling, together with the zero lower bound on the nominal interest rate, imposes a lower bound on the real interest rate; (ii) Some dynastic households have a high propensity to save, due to a preference for wealth; (iii) A downward wage rigidity breaks the deflationary spiral resulting from the lack of demand. In this framework, I derive the paradox of flexibility, of thrift, and of toil. I also show that public debt cannot be unsustainable. The government can implement the first-best allocation of resources without raising the inflation ceiling. To do so, it must tax household wealth and subsidize income from physical capital, through an investment subsidy or a reduction in the taxation of corporate income. This policy is revenue neutral. However, to avoid a jump in the price level upon its implementation, the government needs to redeem the money that had previously been supplied to finance public deficits.
Page updated
Google Sites
Report abuse