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Debt deflation worries: a restatement

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  • Lino Sau

    (University of Turin, Italy)

Abstract

There has recently been a marked increase in debt deflation worries, particularly in the eurozone. This is the second time in recent years that widespread interest in this serious economic phenomenon has come to the fore, the first being during and in the aftermath of the Asian crisis and Japan's great stagnation, the second as a consequence of the current financial turmoil which stemmed from the US, later propagating in Europe. After an overview of the relevant insights by the debt deflation school, in this paper my aim is to update these analyses and findings to understand the causes and consequences of the current debt deflation process. The paper is structured thus: after an introduction, in Section 2 I take a critical look back at the debt deflation school, taking into consideration the seminal contributions and the extensions stemming from them in the literature; in Section 3, I consider the US financial crisis and EU contagion; I then go on, in Section 4, to see how debt deflation theories fare in the context of the present scenario in the EU, after which I draw my conclusions.

Suggested Citation

  • Lino Sau, 2015. "Debt deflation worries: a restatement," Review of Keynesian Economics, Edward Elgar Publishing, vol. 3(3), pages 279-294, July.
  • Handle: RePEc:elg:rokejn:v:3:y:2015:i:3:p279-294
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    References listed on IDEAS

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    1. Sturm, Michael & Sauter, Nicolas, 2010. "The impact of the global financial turmoil and recession on Mediterranean countries’ economies," Occasional Paper Series 118, European Central Bank.
    2. Bertrand Candelon & Franz Palm, 2010. "Erratum to: Banking and Debt Crises in Europe: The Dangerous Liaisons?," De Economist, Springer, vol. 158(3), pages 337-340, September.
    3. Palley, Thomas I., 2009. "America's exhausted paradigm: Macroeconomic causes of the financial crisis and great recession," IPE Working Papers 02/2009, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    4. King, Mervyn, 1994. "Debt deflation: Theory and evidence," European Economic Review, Elsevier, vol. 38(3-4), pages 419-445, April.
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    6. James Tobin, 1993. "Price Flexibility and Output Stability: An Old Keynesian View," Journal of Economic Perspectives, American Economic Association, vol. 7(1), pages 45-65, Winter.
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    8. Bruce C. Greenwald & Joseph E. Stiglitz, 1990. "Macroeconomic Models with Equity and Credit Rationing," NBER Chapters,in: Asymmetric Information, Corporate Finance, and Investment, pages 15-42 National Bureau of Economic Research, Inc.
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    13. Gustavo Adler, 2012. "Intertwined Sovereign and Bank Solvencies in a Model of Self-Fulfilling Crisis," IMF Working Papers 12/178, International Monetary Fund.
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    More about this item

    Keywords

    financial fragility; banking crisis; sovereign crisis; debt deflation;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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