With the recent events of the large-scale financial crisis in some parts of the world and the slowly declining inflation rate in major OECD countries debt deflation has again become an important topic in economic research. In a model with debt issuing firms, financing their investment, we explore the interaction of high nominal levels of debt, output prices, increase in real debt and declining economic activity. This destabilizing mechanism is explored in the context of a small-scale as well as in a large-scale Keynesian demand constraint economy. In both models labor market dynamics are emphasized. Our principle conclusion is that the small-scale as well as the large-scale models are prone to accelerating downward instability caused by over-indebtedness and declining prices if the process is not stopped by floors to deflation by appropriate government policies. Moreover, contrary to conventional views flexible exchange rates may add to downward instability.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Paper provided by Schwartz Center for Economic Policy Analysis (SCEPA), The New School in its series SCEPA Working Papers with number
1999-04.
Cited by: (explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)