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Persistent Demand Shortage Due to Household Debt

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  • Keiichiro KOBAYASHI

Abstract

We construct and analyze a model of household debt with endogenous borrowing constraint, in which a large initial debt has a persistent adverse effect. In this economy, the redistribution shock that makes a percentage of people overly indebted can cause persistent shortages of aggregate demand and inefficiency due to labor-wedge deterioration. Overly accumulated debt may be a primal cause of persistent recessions. Debt forgiveness may be effective to restore aggregate demand and efficiency, and enhance welfare in a crisis-hit economy, where many households suffer from excessive debt burden.

Suggested Citation

  • Keiichiro KOBAYASHI, 2016. "Persistent Demand Shortage Due to Household Debt," Discussion papers 16012, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:16012
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    References listed on IDEAS

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