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Consistent with these empirical observations, this paper extends a standard macroeconomic model to include financial intermediation, long-term defaultable loans, and occasional financial crises.Within this framework, crises are typically preceded by prolonged boom periods.

The representative agent contemplates the possibility of an occasionally binding ZLB that is driven by switching between two local rational expectations equilibria, labeled the "targeted" and "deflation" solutions, respectively. economy experienced a massive expansion of credit, a slowdown in productivity growth, and a rapid increase in income inequality.

Sustained periods when the real interest rate remains below the central bank's estimate of r-star can induce the agent to place a substantially higher weight on the deflation equilibrium, causing it to occasionally become self-fulfilling. In model simulations, raising the central bank's inflation target to 4% from 2% can reduce, but not eliminate, the endogenous switches to the deflation equilibrium. All of these developments may have contributed to an unusual buildup of financial instability.

Is it higher than the growth rate of the economy and, if so, by how much?

Is there a tendency for returns to fall in the long-run?

This paper answers fundamental questions that have preoccupied modern economic thought since the 18th century.

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