Liquidity Trap and Excessive Leverage
Author(s)Korinek, Anton; Simsek, Alp
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We investigate the role of macroprudential policies in mitigating liquidity traps. When constrained households engage in deleveraging, the interest rate needs to fall to induce unconstrained households to pick up the decline in aggregate demand. 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 this environment, households' ex ante leverage and insurance decisions are associated with aggregate demand externalities. Welfare can be improved with macroprudential policies targeted toward reducing leverage. Interest rate policy is inferior to macroprudential policies in dealing with excessive leverage.
DepartmentMassachusetts Institute of Technology. Department of Economics
American Economic Review
American Economic Association (AEA)
Korinek, Anton, and Alp Simsek. “ Liquidity Trap and Excessive Leverage † .” American Economic Review 106, no. 3 (March 2016): 699–738. © 2016 American Economic Association.
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