Household Debt and the Real Interest Rate

Interesting post at Rortybomb by Josh Mason about some research he has done along with Arjun Jayadev. They show that the increase in household debt between 1981 and 1999 was fueled by a higher real interest rate (mainly lower inflation) and not by an increase in borrowing.

The housing bubble, on the other hand, did see a significant increase in borrowing while the recession saw a substantial amount of deleveraging.

I’m not sure what the policy implications are accept that easier money is good for borrowers which may, in turn, be good for the economy. Perhaps a 4% inflation target makes more sense than a 2% one.


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