Indebted Demand

Atif Mian, Ludwig Straub, Amir Sufi

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

We propose a theory of indebted demand, capturing the idea that large debt burdens lower aggregate demand, and thus the natural rate of interest. At the core of the theory is the simple yet underappreciated observation that borrowers and savers differ in their marginal propensities to save out of permanent income. Embedding this insight in a two-agent perpetual-youth model, we find that recent trends in income inequality and financial deregulation lead to indebted household demand, pushing down the natural rate of interest. Moreover, popular expansionary policies-such as accommodative monetary policy-generate a debt-financed short-run boom at the expense of indebted demand in the future. When demand is sufficiently indebted, the economy gets stuck in a debt-driven liquidity trap, or debt trap. Escaping a debt trap requires consideration of less conventional macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality.

Original languageEnglish (US)
Pages (from-to)2243-2307
Number of pages65
JournalQuarterly Journal of Economics
Volume136
Issue number4
DOIs
StatePublished - Nov 1 2021

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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