Understanding Persistent ZLB: Theory and Assessment


Pablo Cuba-Borda

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2024-03 | February 21, 2024

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:Q1-2019:Q4, 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.

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Article Citation

Cuba-Borda, Pablo, and Sanjay R. Singh. 2024. “Understanding Persistent ZLB: Theory and Assessment,” Federal Reserve Bank of San Francisco Working Paper 2024-03. Available at https://doi.org/10.24148/wp2024-03

About the Author
Sanjay R. Singh is a senior economist in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Sanjay R. Singh