Learning to believe in secular stagnation

This paper shows that a secular stagnation equilibrium as proposed by Eggertsson and Mehrotra (2014) is E-stable. This is in contrast to the often studied liquidity trap equilibrium that exist in representative agent New Keynesian models at the zero lower bound when there is active monetary policy following a Taylor rule. This result reconciles the observed stable low growth and low inflation outcomes since the end of the Global Financial Crisis with the instability predicted by the New Keynesian model using a standard modeling framework. (C) 2017 Elsevier B.V. All rights reserved.