Debt Problem and Secular Stagnation

Author Name KOBAYASHI Keiichiro (Faculty Fellow, RIETI)
Creation Date/NO. March 2017 17-P-013
Research Project Microeconomics, Macroeconomics, and Political Philosophy toward Economic Growth
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We review the experience of the Japanese economy in the aftermath of the collapse of the asset-price bubble, and analyze the hypothesis that excessive debt may cause persistent stagnation.

Our simple model shows that overly accumulated debt hinders the economic activity of the borrower. Moreover, if debt exceeds a threshold level, the borrowers' inefficiency continues indefinitely and leads the economy into a persistent stagnation. In this case, the lenders do not have an incentive to reduce debt, and thus government intervention may be necessary to restore economic growth. It is indicated that relief from excessive debt by policy measures such as debt-for-equity swaps, accelerated disposal of nonperforming loans, and bankruptcy procedures can eradicate the direct cause of secular stagnation and restore efficiency, whereas standard macroeconomic policies, i.e., fiscal and monetary policies, merely mitigate the recession indirectly.