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Persistent Demand Shortage Due to Household Debt

Keiichiro Kobayashi

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: We construct and analyze a model of household debt with endogenous borrowing constraint, in which a large initial debt has a persistent adverse effect. In this economy, the redistribution shock that makes a percentage of people overly indebted can cause persistent shortages of aggregate demand and inefficiency due to labor-wedge deterioration. Overly accumulated debt may be a primal cause of persistent recessions. Debt forgiveness may be effective to restore aggregate demand and efficiency, and enhance welfare in a crisis-hit economy, where many households suffer from excessive debt burden.

New Economics Papers: this item is included in nep-ban
Date: 2016-02
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