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  5. Understanding Persistent ZLB: Theory and Assessment

Understanding Persistent ZLB: Theory and Assessment

  • Pablo Cuba-Borda
  • Sanjay R. Singh
American Economic Journal: Macroeconomics (Forthcoming)

Abstract

We develop a theoretical framework that rationalizes two hypotheses of long-lasting low-interest rate episodes: deflationary-expectations-traps and secular stagnation in a unified setting. These hypotheses differ in the sign of the theoretical correlation between inflation and output growth that they imply. Using the data from Japan over 1998:Q1–2019:Q4, we find that the data favor the expectations-trap hypothesis. The superior model fit of the expectations trap relies on its ability to generate the observed negative correlation between inflation and output growth.

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