Debt, Deleveraging and the Liquidity Trap

No 1166, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper we present a simple New Keynesian-style model of debt-driven slumps -- that is, situations in which an overhang of debt on the part of some agents, who are forced into rapid deleveraging, is depressing aggregate demand. Making some agents debt-constrained is a surprisingly powerful assumption: Fisherian debt deflation, the possibility of a liquidity trap, the paradox of thrift, a Keynesiantype multiplier, and a rationale for expansionary fiscal policy all emerge naturally from the model. We argue that this approach sheds considerable light both on current economic difficulties and on historical episodes, including Japan's lost decade (now in its 18th year) and the Great Depression itself.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed011:1166

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More papers in 2011 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.
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