Template-Type: ReDIF-Paper 1.0
Author-Name: Atif Mian
Author-X-Name-First: Atif
Author-X-Name-Last: Mian
Author-Name: Ludwig Straub
Author-X-Name-First: Ludwig
Author-X-Name-Last: Straub
Author-Name: Amir Sufi
Author-X-Name-First: Sufi
Author-X-Name-Last: Amir
Title: Indebted Demand
Abstract: We propose a theory of indebted demand, capturing the idea that large debt burdens lower aggregate demand, and thus the natural rate of interest. 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 perpetual youth model, we find that recent trends in income inequality and financial deregulation lead to indebted household demand, pushing down the natural rate of interest. Moreover, popular expansionary policies-such as accommodative monetary policy-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 conventional macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality.
Length: 69 pages
Creation-Date: 2021-10
File-URL: https://www.bis.org/publ/work968.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work968.htm
File-Format: text/html
Number: 968
Keywords: Indebted demand, inequality, debt, low rates, financial liberalisation
Classification-JEL: E21, E44, E6
Handle: RePEc:bis:biswps:968