EconPapers    
Economics at your fingertips  
 

Liquidity Trap and Excessive Leverage

Alp Simsek and Anton Korinek
Additional contact information
Alp Simsek: Massachusetts Institute of Technology

No 1369, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We investigate the role of debt market policies in mitigating liquidity traps driven by household leverage. When borrowers engage in deleveraging, the interest rate needs to fall to induce lenders to pick up the decline in aggregate demand. However, if the fall in the interest rate is limited by the zero lower bound, aggregate demand is insufficient and the economy enters a liquidity trap. In such an environment, households' borrowing and saving decisions are associated with aggregate demand externalities. The competitive equilibrium allocation is constrained inefficient. Welfare can be improved by ex-ante restrictions on leverage to mitigate prospective deleveraging. Ex-post policies to write down debt also generate positive demand externalities.

Date: 2013
New Economics Papers: this item is included in nep-dge, nep-ger and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed

Downloads: (external link)
https://economicdynamics.org/meetpapers/2013/paper_1369.pdf (application/pdf)

Related works:
Journal Article: Liquidity Trap and Excessive Leverage (2016) Downloads
Working Paper: Liquidity Trap and Excessive Leverage (2014) Downloads
Working Paper: Liquidity Trap and Excessive Leverage (2014) Downloads
Working Paper: Liquidity Trap and Excessive Leverage (2014) Downloads
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:red:sed013:1369

Access Statistics for this paper

More papers in 2013 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().

 
Page updated 2020-06-30
Handle: RePEc:red:sed013:1369