Indebted Demand

Atif Mian, Ludwig Straub and Sufi Amir

No 968, BIS Working Papers from Bank for International Settlements

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 under-appreciated 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.

Keywords: Indebted demand; inequality; debt; low rates; financial liberalisation (search for similar items in EconPapers)
JEL-codes: E21 E44 E6 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2021-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-fdg, nep-isf and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Indebted Demand* (2021)
Working Paper: Indebted Demand (2021)
Working Paper: Indebted Demand (2020)
Working Paper: Indebted Demand (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:968

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