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Debt, Deleveraging and the Liquidity Trap

  • Paul Krugman


  • Gauti B. Eggertsson

    (NY Fed)

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.

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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 1166.

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Date of creation: 2011
Date of revision:
Handle: RePEc:red:sed011:1166
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. James Tobin, 1975. "Keynesian Models of Recession and Depression," Cowles Foundation Discussion Papers 387, Cowles Foundation for Research in Economics, Yale University.
  2. 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.
  3. J. Bradford De Long & Lawrence H. Summers, 1985. "Is Increased Price Flexibility Stabilizing?," NBER Working Papers 1686, National Bureau of Economic Research, Inc.
  4. repec:clu:wpaper:0809-02 is not listed on IDEAS
  5. Michael Woodford, 2000. "Monetary Policy in a World Without Money," NBER Working Papers 7853, National Bureau of Economic Research, Inc.
  6. John Moore & Nobuhiro Kiyotaki, . "Credit Cycles," Discussion Papers 1995-5, Edinburgh School of Economics, University of Edinburgh.
  7. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
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