Asset Prices and Leverage in a Model of Persistent Stagnation

Matthias Schlegl, Gerhard Illing and Yoshiyasu Ono

VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking from Verein für Socialpolitik / German Economic Association

Abstract: We use a stylized MIU-model with a housing sector and financial frictions to study the interactions between debt, liquidity and asset prices under persistent stagnation. Stagnation can occur in equilibrium when households have insatiable liquidity preferences. We show that financially more advanced economies are more likely to enter into stagnation and that stagnation is more severe the higher private sector debt. Moreover, credit booms can temporarily mask the transition into stagnation.

Date: 2017
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