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  3. American Economic Review
  4. March 2016
  5. Liquidity Trap and Excessive Leverage

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Liquidity Trap and Excessive Leverage

  • Anton Korinek
  • Alp Simsek
American Economic Review
vol. 106, no. 3, March 2016
(pp. 699–738)
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Abstract

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. (JEL D14, E23, E32, E43, E52, E61, E62)

Citation

Korinek, Anton, and Alp Simsek. 2016. "Liquidity Trap and Excessive Leverage." American Economic Review, 106 (3): 699–738. DOI: 10.1257/aer.20140289

Additional Materials

JEL Classification

  • D14 Household Saving; Personal Finance
  • E23 Macroeconomics: Production
  • E32 Business Fluctuations; Cycles
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E52 Monetary Policy
  • E61 Policy Objectives; Policy Designs and Consistency; Policy Coordination
  • E62 Fiscal Policy