Neil R. Mehrotra

Research Economist
Personal website

Secular stagnation
Interest rates
Monetary policy

Neil Mehrotra is a research economist at the Federal Reserve Bank of Minneapolis and an assistant professor in the Department of Economics at Brown University. Neil received his M.A. and Ph.D. in economics from Columbia University. His work has appeared in the American Economic Review, Papers and Proceedings, and has received press coverage from various news outlets, including the Washington Post, New York Times, and Business Insider. His latest research focuses on secular stagnation, falling interest rates, and the implications of low interest rates for monetary policy.

Secular Stagnation in the Open Economy

Conditions of secular stagnation–low interest rates, below target inflation, and sluggish output growth–now characterize much of the global economy. We consider a simple two-country textbook model to examine how capital markets transmit secular stagnation and to study policy externalities across countries. We find capital flows transmit recessions in a world with low interest rates and that policies that attempt to boost national saving are beggar-thy-neighbor. Monetary expansion cannot eliminate a secular stagnation and may have beggar-thy-neighbor effects, while sufficiently large fiscal interventions can eliminate a secular stagnation and carry positive externalities.

A Model of Secular Stagnation

Japan’s two-decade-long malaise and the Great Recession have renewed interest in the secular stagnation hypothesis, but until recently this theory has not been explicitly formalised. This chapter explains the core logic of a new model that does just that. In the model, an increase in inequality, a slowdown in population growth, and a tightening of borrowing limits all reduce the equilibrium real interest rate. Unlike in other recent models, a period of deleveraging puts even more downward pressure on the real interest rate so that it becomes permanently negative.

A Contagious Malady? Open Economy Dimensions of Secular Stagnation 

Conditions of secular stagnation – low interest rates, below target inflation, and sluggish output growth – characterize much of the global economy. We consider an overlapping generations, open economy model of secular stagnation, and examine the effect of capital flows on the transmission of stagnation. In a world with a low natural rate of interest, greater capital integration transmits recessions across countries as opposed to lower interest rates. In a global secular stagnation, expansionary fiscal policy carries positive spillovers implying gains from coordination, and fiscal policy is self-financing. Expansionary monetary policy, by contrast, is beggar-thy-neighbor with output gains in one country coming at the expense of the other. Similarly, we find that competitiveness policies including structural labor market reforms or neomercantilist trade policies are also beggar-thy-neighbor in a global secular stagnation.

Financial Shocks and Job Flows

In this paper, we argue that aggregate job flows and job flows across firm age and size can be used to measure the employment effects of disruptions to firm credit. Using a heterogenous firm dynamics model, we establish that a tightening of credit to firms reduces employment primarily by reducing gross job creation, exhibiting stronger effects at new/young firms (0-5 years) and middle-sized firm (20-99 employees). We estimate that 15% of the decline in US employment during the Great Recession is due to the firm credit channel. Using MSA-level job flows data, we show that the behavior of job flows in response to identified credit shocks is consistent with our model’s predictions.

A Model of Secular Stagnation

We propose an overlapping generations New Keynesian model in which a permanent (or very persistent) slump is possible without any self-correcting force to full employment. The trigger for the slump is a deleveraging shock, which creates an oversupply of savings. Other forces that work in the same direction and can both create or exacerbate the problem include a drop in population growth, an increase in income inequality, and a fall in the relative price of investment. Our model sheds light on the long persistence of the Japanese crisis, the Great Depression, and the slow recovery out of the Great Recession. It also highlights several implications for policy.

Fiscal Policy Stabilization: Purchases or Transfers?

Both government purchases and transfers figure prominently in the use of fiscal policy for counteracting recessions. However, existing representative agent models including the neoclassical and New Keynesian benchmark rule out transfers by assumption. This paper provides a role for transfers by building a borrower-lender model with equilibrium credit spreads and monopolistic competition. The model demonstrates that a broad class of deficit-financed government expenditures can be expressed in terms of purchases and transfers. With flexible prices and in the absence of wealth effects on labor supply, transfers and purchases have no effect on aggregate output and employment. Under sticky prices and no wealth effects, fiscal policy is redundant to monetary policy. Alternatively, in the presence of wealth effects, multipliers for both purchases and transfers will depend on the behavior of credit spreads, but purchases are preferred to transfers under reasonable calibrations due to its larger wealth effect on labor supply. When the zero lower bound is binding, both purchases and transfers are effective in counteracting a recession, but the size of the transfer multiplier relative to the purchases multiplier is increasing in the debt elasticity of the credit spread.

Sectoral Shocks, the Beveridge Curve and Monetary Policy

The slow recovery of the US labor market and the observed shift in the Beveridge curve has prompted speculation that sector-specific shocks may be responsible for the current recession. We document a significant correlation between shifts in the US Beveridge curve in postwar data and periods of elevated sectoral shocks, relying on a factor analysis of sectoral employment to derive our sectoral shock index. We provide conditions under which sector-specific shocks in a multisector model augmented with labor market search generate outward shifts in the Beveridge curve and raise the natural rate of unemployment. Consistent with empirical evidence, our model also generates cyclical movements in aggregate matching function efficiency and mismatch across sectors. We calibrate a two-sector version of our model and demonstrate that a negative shock to construction employment calibrated to match employment shares can fully account for the outward shift in the Beveridge curve. We augment our standard multisector model with financial frictions to demonstrate that financial shocks or a binding zero lower bound can act like sectoral productivity shocks, generating a shift in the Beveridge curve that may be counteracted by expansionary monetary policy.