Our Debt is Overhung
And we are in deep Minsky Koo, it appears.
Public Debt Overhangs: Advanced-Economy Episodes since 1800
Carmen Reinhart, Vincent Reinhart & Kenneth Rogoff
Journal of Economic Perspectives, Summer 2012, Pages 69–86
We identify the major public debt overhang episodes in the advanced economies since the early 1800s, characterized by public debt to GDP levels exceeding 90 percent for at least five years. Consistent with Reinhart and Rogoff (2010) and most of the more recent research, we find that public debt overhang episodes are associated with lower growth than during other periods. The duration of the average debt overhang episode is perhaps its most striking feature. Among the 26 episodes we identify, 20 lasted more than a decade. The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that the cumulative shortfall in output from debt overhang is potentially massive. These growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates, as in eleven of the episodes, interest rates are not materially higher.
Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach
Gauti Eggertsson & Paul Krugman
Quarterly Journal of Economics, forthcoming
In this article we present a simple new Keynesian–style model of debt-driven slumps — that is, situations in which an overhang of debt on the part of some agents, who are forced into rapid deleveraging, is depressing aggregate demand. Making some agents debt-constrained is a surprisingly powerful assumption. Fisherian debt deflation, the possibility of a liquidity trap, the paradox of thrift and toil, a Keynesian-type multiplier, and a rationale for expansionary fiscal policy all emerge naturally from the model. We argue that this approach sheds considerable light both on current economic difficulties and on historical episodes, including Japan’s lost decade (now in its 18th year) and the Great Depression itself.
With thanks to Kevin Lewis