Persistent Demand Shortage Due to Household Debt

Author Name KOBAYASHI Keiichiro (Faculty Fellow, RIETI)
Creation Date/NO. February 2016 16-E-012
Research Project Microeconomics, Macroeconomics, and Political Philosophy toward Economic Growth
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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.