Jean-Baptiste Michau

Polytechnique

will give a presentation on

Fiscal Policy under Secular Stagnation: An Optimal Pump-Priming Strategy

Abstract:

How can the government move the economy from a secular stagnation equilibrium, with under-employment and a permanently binding zero lower bound, to a neoclassical equilibrium, with full employment? This can be achieved through a temporary, but massive, fiscal stimulus to overheat the economy such as to raise the inflation anchor. Despite the substantial cost of overheating the economy, this policy is typically optimal. The lack of fiscal space cannot prevent the government from pump priming the economy through fiscal policy. It may in fact help spur inflation. To keep a tight control over the price level, government debt should have a sufficiently long maturity.