Credit booms, debt overhang and secular stagnation

Abstract

Why do advanced economies fall into prolonged periods of economic stagnation, particularly in the aftermath of credit booms? We present a model of persistent aggregate demand shortage based on strong liquidity preferences of households, in which we incorporate financial imperfections to study the interactions between debt, liquidity and asset prices. We show that financially more deregulated economies are more likely to experience persistent stagnation. In the short run, credit booms can mask this structural aggregate demand deficiency. However, the resulting debt overhang permanently depresses spending in the long run since deleveraging becomes self-defeating because of debt deflation. These findings are in line with the macroeconomic developments in Japan during its lost decades and other advanced economies before and during the Great Recession. JEL-Codes: E410.

Immigration and Secular Stagnation

“…When = 1, we say there is full employment; otherwise, unemployment prevails. It is to be demonstrated, in the next section, that the presence of the lower bound β > 0 on ′( ) is crucial for the existence of unemployment as discussed by Ono (1994Ono ( , 2001 and Illing et al (2018).…”

Environmental Policies in a Stagnant Economy

“…If τ φ ′ (h t ) that satisfies the first equation in (11) is higher (lower) than the w t determined in the labor market, the firm will hire infinite (zero) labor. Thus, w t is determined so that it satisfies (10) and (11). From (9) and 11, we find…”

“…From (10) and 11, real wage w t (= W t /P t ) is constant over time once τ is given, and hence the movement of W t represented by (19) yields…”

Homeownership Rate and Other House Price Determinants Impacts on New House Prices in Colombia

“…The literature has also shown that certain movements in the economic cycle of certain countries have been caused by the indebtedness promoted by the increase in the price of housing (Illing et al, 2018). According to the International Monetary Fund (IMF), increasing household debt drives economic growth and employment (Lai et al, 2017).…”