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Keynesian Models of Deflation and Depression Revisited: Inside Debt and Price Flexibility

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  • Thomas I. Palley

Abstract

This paper extends Tobin’s (1975) Keynesian analysis of deflation to include a range of additional channels through which deflation exacerbates Keynesian unemployment. The paper provides further theoretical reasons why downward price level adjustment may not solve the Keynesian problem. These arguments challenge the received wisdom that Keynes’ General Theory is a special case resting on downwardly rigid prices and nominal wages. This conventional wisdom has led many economists to recommend policies promoting downward flexibility. These policies have created an environment in which deflation is more likely, giving new relevance to Keynesian analysis of deflation.

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File URL: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_151-200/WP169.pdf
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Bibliographic Info

Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp169.

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Date of creation: 2008
Date of revision:
Handle: RePEc:uma:periwp:wp169

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Related research

Keywords: deflation; liquidity trap; Fisher debt effect; price flexibility;

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  1. James Tobin, 1975. "Keynesian Models of Recession and Depression," Cowles Foundation Discussion Papers 387, Cowles Foundation for Research in Economics, Yale University.
  2. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  3. Palley, Thomas I., 1999. "General disequilibrium analysis with inside debt," Journal of Macroeconomics, Elsevier, vol. 21(4), pages 785-803.
  4. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
  5. James Tobin, 1982. "Money and Finance in the Macro-Economic Process," Cowles Foundation Discussion Papers 613R, Cowles Foundation for Research in Economics, Yale University.
  6. J. Bradford De Long & Lawrence H. Summers, 1987. "Is Increased Price Flexibility Stabilizing?," NBER Working Papers 1686, National Bureau of Economic Research, Inc.
  7. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
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Cited by:
  1. Sherrill Shaffer, 2008. "Earnings Valuation And Sources Of Growth," CAMA Working Papers 2008-32, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Fazzari, Steven M. & Ferri, Piero & Greenberg, Edward, 2010. "Investment and the Taylor rule in a dynamic Keynesian model," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 2010-2022, October.

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