Indebted Demand*
Atif Mian,
Ludwig Straub and
Amir Sufi
The Quarterly Journal of Economics, 2021, vol. 136, issue 4, 2243-2307
Abstract:
We propose a theory of indebted demand, capturing the idea that large debt burdens lower aggregate demand, and thus the natural rate of interest. At the core of the theory is the simple yet underappreciated observation that borrowers and savers differ in their marginal propensities to save out of permanent income. Embedding this insight in a two-agent perpetual-youth model, we find that recent trends in income inequality and financial deregulation lead to indebted household demand, pushing down the natural rate of interest. Moreover, popular expansionary policies—such as accommodative monetary policy—generate a debt-financed short-run boom at the expense of indebted demand in the future. When demand is sufficiently indebted, the economy gets stuck in a debt-driven liquidity trap, or debt trap. Escaping a debt trap requires consideration of less conventional macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality.
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (2)
Downloads: (external link)
http://hdl.handle.net/10.1093/qje/qjab007 (application/pdf)
Access to full text is restricted to subscribers.
Related works:
Working Paper: Indebted Demand (2021) 
Working Paper: Indebted Demand (2021) 
Working Paper: Indebted Demand (2020) 
Working Paper: Indebted Demand (2020) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:oup:qjecon:v:136:y:2021:i:4:p:2243-2307.
Ordering information: This journal article can be ordered from
https://academic.oup.com/journals
Access Statistics for this article
The Quarterly Journal of Economics is currently edited by Robert J. Barro, Lawrence F. Katz, Nathan Nunn, Andrei Shleifer and Stefanie Stantcheva
More articles in The Quarterly Journal of Economics from President and Fellows of Harvard College
Bibliographic data for series maintained by Oxford University Press ().