Inequality and central banks

This event is part of the virtual 20th Annual Conference webinars and panel discussions that were livestreamed on our website from 23 to 28 June.

25 Jun 2021

Atif Mian speaks about indebted demand, followed by a discussion with Evi Pappa.

Abstract

In his webinar, Professor Mian presented "Indebted demand", a paper co-authored with Ludwig Straub (Harvard & NBER) and Amir Sufi (Chicago Booth & NBER).

Mr Mian and his co-authors 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 underappreciated 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, they 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.

About the speaker

Atif Mian
John H Laporte, Jr Class of 1967 Professor of Economics, Princeton University

Atif Mian holds a bachelor's degree in Mathematics with Computer Science and PhD in Economics from MIT. Prior to joining Princeton in 2012, he taught at the University of California, Berkeley and the University of Chicago Booth School of business. Professor Mian's work studies the connections between finance and the macro economy, and has been published in various academic journals. He is also the author of the critically acclaimed book, House of Debt, with Amir Sufi. 

About the discussant

Evi Pappa
Full Professor of Macroeconomics, Universidad Carlos III de Madrid 

Evi Pappa is a member of the European Economic Association Standing Committee on Women in Economics.  Her research focuses on topics at the intersection of macroeconomics, monetary policy and public finance within developed economies.

Professor Pappa has held positions in different universities in Europe (LSE, Bocconi, UAB, University of Bern and the EUI), and acted as a visiting researcher and consultant in many central banks (recently in the Bank of Spain, the Bank of Canada, the Bank of England, and the European Central Bank). Professor Pappa is also a Research Fellow of the Centre for Economic Policy Research (CEPR). She serves as an associate editor of the Economic Journal, the Journal of International Economics, the BE Journal of Macroeconomics and the Journal of the Spanish Economic Association.