Credit Booms, Debt Overhang and Secular Stagnation

Gerhard Illing, Yoshiyasu Ono and Matthias Schlegl

No 6796, CESifo Working Paper Series from CESifo

Abstract: Why do advanced economies fall into prolonged periods of economic stagnation, particularly in the aftermath of credit booms? We present a model of persistent aggregate demand shortage based on strong liquidity preferences of households, in which we incorporate financial imperfections to study the interactions between debt, liquidity and asset prices. We show that financially more deregulated economies are more likely to experience persistent stagnation. In the short run, credit booms can mask this structural aggregate demand deficiency. However, the resulting debt overhang permanently depresses spending in the long run since deleveraging becomes self-defeating because of debt deflation. These findings are in line with the macroeconomic developments in Japan during its lost decades and other advanced economies before and during the Great Recession.

Keywords: secular stagnation; aggregate demand deficiency; liquidity preferences; financial frictions. leverage (search for similar items in EconPapers)
JEL-codes: E41 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Credit booms, debt overhang and secular stagnation (2018)
Working Paper: Credit Booms, Debt Overhang and Secular Stagnation (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_6796

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