European Parliament Library

Liquidity Trap and Excessive Leverage, Anton Korinek, Alp Simsek

We investigate the role of macroprudential policies in mitigating liquidity traps driven by deleveraging, using a simple Keynesian model. When constrained agents engage in deleveraging, the interest rate needs to fall to induce unconstrained agents to pick up the decline in aggregate demand. However, if the fall in the interest rate is limited by the zero lower bound, aggregate demand is insufficient and the economy enters a liquidity trap. In such an environment, agents' exante leverage and insurance decisions are associated with aggregate demand externalities. The competitive equilibrium allocation is constrained inefficient. Welfare can be improved by ex-ante macroprudential policies such as debt limits and mandatory insurance requirements. The size of the required intervention depends on the differences in marginal propensity to consume between borrowers and lenders during the deleveraging episode. In our model, contractionary monetary policy is inferior to macroprudential policy in addressing excessive leverage, and it can even have the unintended consequence of increasing leverage
Table Of Contents
""Cover""; ""Contents""; ""1 Introduction""; ""1.1 Related literature""; ""2 Environment and equilibrium""; ""3 An anticipated demand-driven recession""; ""4 Excessive leverage""; ""4.1 Aggregate demand externalities""; ""4.2 Excessive leverage""; ""4.3 MPC differences and the magnitude of the inefficiency""; ""5 Uncertainty and underinsurance""; ""6 Preventive monetary policies""; ""6.1 Changing the inflation target""; ""6.2 Contractionary monetary policy""; ""7 Aggregate demand and fire-sale externalities""; ""8 Conclusion""; ""A: Appendix: Extensions and omitted proofs""
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (50 p.)
Specific Material Designation
Form Of Item

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