Absolutely intriguing @CESifoGroup working paper no 8210 by @AtifRMian, @ludwigstraub and @profsufi on the detrimental effects of ever more indebted households, resulting in a #debt trap where HH reduce their consumption demand due to their debt service (and precaution) - thread
Quite contrary to the neoclassical model where increasing debt results in higher rates ceteris paribus, the Keynesian modelling of the authors leads to a lower natural (!) interest rate because higher household debt dampens effective demand and thus the propensity to invest.
2/
As such, high levels of inequality suddenly become relevant for macroeconomic policy, since borrowers and savers typically sport very different propensities to consume: The greater the imbalance towards increasingly wealthy savers, thus, the larger the effect of the debt trap.
3/
Since bigger, debt-financed fiscal spending doesn't change anything about this problem because the government debt itself contributes to the debt trap, redistributive tax and spend policies become relevant as a potential remedy.
/ends
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