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Credit Booms, Debt Overhang and Secular Stagnation

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  • Gerhard Illing
  • Yoshiyasu Ono
  • Matthias Schlegl

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.

Suggested Citation

  • Gerhard Illing & Yoshiyasu Ono & Matthias Schlegl, 2016. "Credit Booms, Debt Overhang and Secular Stagnation," ISER Discussion Paper 0988r, Institute of Social and Economic Research, Osaka University, revised Nov 2017.
    • Handle: RePEc:dpr:wpaper:0988r
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    Cited by:

    1. Atif Mian & Ludwig Straub & Amir Sufi, 2021. "Indebted Demand," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 136(4), pages 2243-2307.
    2. Hashimoto, Ken-ichi & Ono, Yoshiyasu & Schlegl, Matthias, 2023. "Structural unemployment, underemployment, and secular stagnation," Journal of Economic Theory, Elsevier, vol. 209(C).
    3. Daisuke Matsuzaki & Yoshiyasu Ono, 2023. "Economic stimulus effects of product innovation under demand stagnation," ISER Discussion Paper 1204rr, Institute of Social and Economic Research, Osaka University, revised Sep 2023.
    4. Kaz Miyagiwa & Yoshiyasu Ono, 2019. "Immigration and Secular Stagnation," ISER Discussion Paper 1054, Institute of Social and Economic Research, Osaka University.
    5. Ken-ichi Hashimoto & Yoshiyasu Ono & Matthias Schlegl, 2020. "Structural Unemployment, Underemployment, and Secular Stagnation," CESifo Working Paper Series 8318, CESifo.
    6. Ikefuji, Masako & Ono, Yoshiyasu, 2021. "Environmental policies in a stagnant economy," Economic Modelling, Elsevier, vol. 102(C).
    7. Matthias Schlegl, 2018. "Secular Stagnation in an Economy with Land," ISER Discussion Paper 1032, Institute of Social and Economic Research, Osaka University.
    8. Kaz Miyagiwa & Yoshiyasu Ono, 2019. "Immigration and Secular Stagnation," ISER Discussion Paper 1054r, Institute of Social and Economic Research, Osaka University, revised Jun 2019.
    9. Daisuke Matsuzaki & Yoshiyasu Ono, 2023. "Economic stimulus effects of product innovation under demand stagnation," ISER Discussion Paper 1204, Institute of Social and Economic Research, Osaka University.
    10. Ken-ichi Hashimoto & Yoshiyasu Ono & Matthias Schlegl, 2020. "Structural Unemployment, Underemployment, and Secular Stagnation," CESifo Working Paper Series 8318, CESifo.
    11. Murota, Ryu-ichiro, 2019. "Negative interest rate policy in a permanent liquidity trap," MPRA Paper 93498, University Library of Munich, Germany.
    12. Ryo Horii & Yoshiyasu Ono, 2022. "Financial crisis and slow recovery with Bayesian learning agents," International Journal of Economic Theory, The International Society for Economic Theory, vol. 18(4), pages 578-606, December.
    13. Daisuke Matsuzaki & Yoshiyasu Ono, 2023. "Economic stimulus effects of product innovation under demand stagnation," ISER Discussion Paper 1204r, Institute of Social and Economic Research, Osaka University, revised Jul 2023.
    14. Masako Ikefuji & Yoshiyasu Ono, 2023. "Environmental Policies and Stagnation in a Two-Country Economy," ISER Discussion Paper 1222, Institute of Social and Economic Research, Osaka University.
    15. Hashimoto, Ken-ichi & Ono, Yoshiyasu, 2020. "A simple aggregate demand analysis with dynamic optimization in a small open economy," Economic Modelling, Elsevier, vol. 91(C), pages 89-99.

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    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money

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