Saturday, April 16, 2011

The debt overhang theory of the Great Moderation

In advanced economies, the collapse of housing bubbles and the overhang of debt run up during the Great Moderation is leading to persistently depressed demand, even with very low policy interest rates. The result is low returns to investment; not much point in adding to capacity when you’re not using the capacity you have. By Krugman
Yes, increasing debt made the Great Moderation happen.

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