Debt, Deleveraging and the Liquidity Trap
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 of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- James Tobin, 1975.
"Keynesian Models of Recession and Depression,"
Cowles Foundation Discussion Papers
387, Cowles Foundation for Research in Economics, Yale University.
- Aiyagari, S Rao, 1994.
"Uninsured Idiosyncratic Risk and Aggregate Saving,"
The Quarterly Journal of Economics,
MIT Press, vol. 109(3), pages 659-84, August.
- De Long, James Bradford & Summers, Lawrence H, 1986.
"Is Increased Price Flexibility Stabilizing?,"
American Economic Review,
American Economic Association, vol. 76(5), pages 1031-44, December.
- Michael Woodford, 2000.
"Monetary Policy in a World Without Money,"
NBER Working Papers
7853, National Bureau of Economic Research, Inc.
- John Moore & Nobuhiro Kiyotaki, .
1995-5, Edinburgh School of Economics, University of Edinburgh.
- Vasco Cúrdia & Michael Woodford, 2009.
"Credit frictions and optimal monetary policy,"
BIS Working Papers
278, Bank for International Settlements.
- Vasco Curdia & Michael Woodford, 2008. "Credit Frictions and Optimal Monetary Policy," Discussion Papers 0809-02, Columbia University, Department of Economics.
- Vasco Cúrdia & Michael Woodford, 2008. "Credit frictions and optimal monetary policy," Working Paper Research 146, National Bank of Belgium.
- Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
When requesting a correction, please mention this item's handle: RePEc:red:sed011:1166. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.