Secular Stagnation and Inequality

In line with the growing strand of literature on the secular stagnation hypothesis, this paper expands the seminal work of Eggertsson, Mehrotra, and Robbins (2017) to allow for income inequality in a two-household type setting and argue that the aforementioned is among the secular forces that have been steadily driving real interest rates down for the past three decades. Additionally, by exploring the AD/AS environment, this paper finds that the previous result has a real impact on the aggregate economy, where for a high-enough level of income inequality, a permanent, uniquely determined secular stagnation equilibrium arises. Lastly, this paper looks both at Monetary and Fiscal Policies to understand how conventional stabilization measures could aid in solving secular stagnation. On the one hand, Monetary Policy is deemed to be fairly ineffective in the presence of rising inequality, due to the aggravation of the so-called timidity-trap. On the other hand, Fiscal Policies are revealed to have a very relevant role in stimulating the economy. Particularly, this paper finds that there is considerable scope for redistributive policies to pull the economy out of a secular stagnation equilibrium.