Credit Booms, Debt Overhang and Secular Stagnation

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 6796

Classification and Topics

• Classification: Wirtschaft ; Demand for Money
• Subject: secular stagnation ; aggregate demand deficiency ; liquidity preferences ; financial frictions. leverage

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Illing, Gerhard ; Ono, Yoshiyasu ; Schlegl, Matthias
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/174919
• Last update: 10.03.2025, 11:43 AM CET