Speaker: Neil Mehrotra is an Assistant Professor of Economics at Brown University. More »
Abstract: We extend the idea of secular stagnation (Hansen (1939), Summers (2013)) to a two country open economy world with integrated financial markets. Our framework also allows us to incorporate the global savings glut hypothesis (Bernanke (2015)) into a secular stagnation framework. We consider varying degrees of capital market integration and show that, when the world natural rate of interest is negative, one or both countries may be in a secular stagnation (binding zero lower bound, deflation, and persistent output gap). Capital controls can be beneficial for the country that has a positive natural rate under autarky. In our setting, reserve accumulation may either cause or exacerbate a secular stagnation by further lowering the world natural rate of interest. Policy responses include a global increase in the inflation target or fiscal policy to raise the world natural rate of interest. The gains from monetary and/or fiscal policy coordination are substantial in our framework.
Last Updated: Mar 03, 2016