Indebted Demand
Atif Mian,
Ludwig Straub and
Amir Sufi
No 8210, CESifo Working Paper Series from CESifo
Abstract:
We propose a theory of indebted demand, capturing the idea that large debt burdens by households and governments lower aggregate demand, and thus natural interest rates. 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 overlapping-generations model, we find that recent trends in income inequality and financial liberalization lead to indebted household demand, pushing down natural interest rates. Moreover, popular expansionary policies—such as accommodative monetary policy and deficit spending—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 standard macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality.
Keywords: aggregate demand; debt; interest rates; inequality; secular stagnation (search for similar items in EconPapers)
JEL-codes: D31 E21 E32 E43 E44 E52 E62 G51 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations:
Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp8210.pdf (application/pdf)
Related works:
Journal Article: Indebted Demand* (2021) 
Working Paper: Indebted Demand (2021) 
Working Paper: Indebted Demand (2021) 
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:ces:ceswps:_8210
Access Statistics for this paper
More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().