Abstract
This paper studies the effects of natural rate shocks on output and inflation. It estimates a semi-structural model inspired by the DSGE literature. A decline in the natural rate is found to lower trend output and to be contractionary and deflationary in the short run. When the economy is constrained by the zero lower bound (ZLB), these results are consistent with the secular stagnation hypothesis. However, negative natural rate shocks are found to depress the trend of output even outside of the ZLB, calling for a more general theory. A model with liquidity scarcity is proposed as a first step.
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© 2025 by The President and Fellows of Harvard College and the Massachusetts Institute of Technology
2025
The President and Fellows of Harvard College and the Massachusetts Institute of Technology
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