Fiscal policy under secular stagnation: An optimal pump-priming strategy

Jean Baptiste Michau

doi:10.1016/j.jedc.2025.105097

Fiscal policy under secular stagnation: An optimal pump-priming strategy

Jean Baptiste Michau

Ecole Polytechnique

Research output: Contribution to journal › Article › peer-review

Abstract

How can a depressed economy escape a permanent liquidity trap, such as to restore 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 pump-priming policy is typically optimal. The lack of fiscal space cannot prevent the government from pump priming the economy through fiscal policy.

Original language	English
Article number	105097
Journal	Journal of Economic Dynamics and Control
Volume	175
DOIs	https://doi.org/10.1016/j.jedc.2025.105097
Publication status	Published - 1 Jun 2025
Externally published	Yes

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 8 Decent Work and Economic Growth

Keywords

Fiscal policy
Liquidity trap
Overheating
Secular stagnation

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10.1016/j.jedc.2025.105097

Cite this

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abstract = "How can a depressed economy escape a permanent liquidity trap, such as to restore 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 pump-priming policy is typically optimal. The lack of fiscal space cannot prevent the government from pump priming the economy through fiscal policy.",

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AB - How can a depressed economy escape a permanent liquidity trap, such as to restore 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 pump-priming policy is typically optimal. The lack of fiscal space cannot prevent the government from pump priming the economy through fiscal policy.

KW - Fiscal policy

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KW - Overheating

KW - Secular stagnation

UR - https://www.scopus.com/pages/publications/105001857211

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DO - 10.1016/j.jedc.2025.105097

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ER -

Fiscal policy under secular stagnation: An optimal pump-priming strategy

Abstract

UN SDGs

Keywords

Access to Document

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