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This paper discusses the neoclassically-inspired Secular Stagnation Theory. Its ‘demand-side’ explanation is based on a long-run equilibrium position featuring a negative natural rate of interest. The first objective of the paper is to show that this concept is not acceptable in a neoclassical framework. This claim is made after studying plausibility of the hypotheses and logical consistency of the position in: the Euler equation, the Wicksellian/IS-LM model, the Ramsey model, and the Overlapping generations model. The second objective is to show that the long-lasting deficit-spending policy proposal, which is remarkable and should be welcomed, is inconsistent with the neoclassical framework. Without a negative natural interest rate and the zero lower bound, arguing so forcefully for deficit-spending would not be possible. The Secular Stagnation Theory can be strengthened and consistently proposed if analysis is placed outside the neoclassical framework. Demand-led models are advocated to be better equipped to account for stagnation.

Discussing Secular Stagnation: A case for freeing good ideas from theoretical constraints?