Keynesian Models of Deflation and Depression Revisited: Inside Debt and Price Flexibility
AbstractThis 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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Bibliographic InfoPaper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp169.
Date of creation: 2008
Date of revision:
deflation; liquidity trap; Fisher debt effect; price flexibility;
Find related papers by JEL classification:
- E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-05-10 (All new papers)
- NEP-CBA-2008-05-10 (Central Banking)
- NEP-HPE-2008-05-10 (History & Philosophy of Economics)
- NEP-MAC-2008-05-10 (Macroeconomics)
- NEP-PKE-2008-05-10 (Post Keynesian Economics)
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.:
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613R, Cowles Foundation for Research in Economics, Yale University.
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- J. Bradford De Long & Lawrence H. Summers, 1987.
"Is Increased Price Flexibility Stabilizing?,"
NBER Working Papers
1686, National Bureau of Economic Research, Inc.
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- 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.
- 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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