TY  - JOUR
AU  - Korinek, Anton
AU  - Simsek, Alp
TI  - Liquidity Trap and Excessive Leverage
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 19970
PY  - 2014
Y2  - March 2014
DO  - 10.3386/w19970
UR  - http://www.nber.org/papers/w19970
L1  - http://www.nber.org/papers/w19970.pdf
N1  - Author contact info:
Anton Korinek
Department of Economics
University of Virginia
Monroe Hall 246
248 McCormick Rd
Charlottesville, VA 22904
E-Mail: anton@korinek.com

Alp Simsek
Department of Economics, E52-552
MIT
77 Massachusetts Avenue
Cambridge, MA 02139
Tel: (617) 253-4836
Fax: (617) 253-1330
E-Mail: asimsek@mit.edu
AB  - 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' ex-ante 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.
ER  -