May 27 2022 46 mins
Professor Atif Mian presented views on “Inequality and central banks” which is based on "Indebted demand", a paper co-authored with Ludwig Straub (Harvard & NBER) and Amir Sufi (Chicago Booth & NBER).
The Henry Thornton Lecture Series, inaugurated in 1979 and hosted by the Centre for Banking Research at Bayes Business School, focuses on monetary theory and monetary policy, and finance.
Professor Mian and his co-authors propose a theory of indebted demand, capturing the idea that large debt burdens lower aggregate demand, and thus the natural rate of interest. At the core of the theory is the simple yet underappreciated observation that borrowers and savers differ in their marginal propensities to save out of permanent income. Embedding this insight in a two-agent perpetual-youth model, they find that recent trends in income inequality and financial deregulation lead to indebted household demand, pushing down the natural rate of interest. Moreover, popular expansionary policies-such as accommodative monetary policy-generate a debt-financed short-run boom at the expense of indebted demand in the future. When demand is sufficiently indebted, the economy gets stuck in a debt-driven liquidity trap, or debt trap. Escaping a debt trap requires consideration of less conventional macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality.
The Henry Thornton Lecture Series, inaugurated in 1979 and hosted by the Centre for Banking Research at Bayes Business School, focuses on monetary theory and monetary policy, and finance.
Professor Mian and his co-authors propose a theory of indebted demand, capturing the idea that large debt burdens lower aggregate demand, and thus the natural rate of interest. At the core of the theory is the simple yet underappreciated observation that borrowers and savers differ in their marginal propensities to save out of permanent income. Embedding this insight in a two-agent perpetual-youth model, they find that recent trends in income inequality and financial deregulation lead to indebted household demand, pushing down the natural rate of interest. Moreover, popular expansionary policies-such as accommodative monetary policy-generate a debt-financed short-run boom at the expense of indebted demand in the future. When demand is sufficiently indebted, the economy gets stuck in a debt-driven liquidity trap, or debt trap. Escaping a debt trap requires consideration of less conventional macroeconomic policies, such as those focused on redistribution or those reducing the structural sources of high inequality.