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  4. July 2024
  5. Understanding Persistent ZLB: Theory and Assessment

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

Understanding Persistent ZLB: Theory and Assessment

  • Pablo Cuba-Borda
  • Sanjay R. Singh
American Economic Journal: Macroeconomics
vol. 16, no. 3, July 2024
(pp. 389–416)
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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:I–2019:IV, 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.

Citation

Cuba-Borda, Pablo, and Sanjay R. Singh. 2024. "Understanding Persistent ZLB: Theory and Assessment." American Economic Journal: Macroeconomics, 16 (3): 389–416. DOI: 10.1257/mac.20210453

Additional Materials

JEL Classification

  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
  • E31 Price Level; Inflation; Deflation
  • E32 Business Fluctuations; Cycles
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E52 Monetary Policy
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