The Persistence of Low Growth and Low Inflation in a New Keynesian Model with Human Capital-based Endogenous Growth

• Applicant: Mewael Frezghi Tesfaselassie, Ph.D.
• Subject Area: Economic Theory
• Term: from 2018 to 2021
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 411622993

Recent academic and policy discussions have focused on two related issues: (i) whether advanced countries are trapped in a prolonged period of low growth-low inflation and (ii) whether the persistence of low inflation despite declining unemployment reflects a flattening of the Phillips curve, with implications for the effectiveness of aggregate demand policies. However, there is still a lack of a coherent theoretical framework for understanding these phenomena. The proposed project aims to fill this gap by developing a New-Keynesian DSGE model that is based on three pillars: endogenous growth based on human capital accumulation, labor market frictions and nominal price inertia. The proposed project relies on our preliminary work on business cycle effects of exogenous growth, which already provides a partial picture of the endogenous interaction between growth and inflation. The proposed project intends to endogenize long-run growth by considering the human capital channel and its interaction with labor market frictions, price inertia, and business cycle shocks.

• DFG Programme: Research Grants