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The Economic Consequences of Debt-Deflation

In: Macroeconomic Theories and Policies for the 1990s

Author

Listed:
  • Henrik Lando

Abstract

A central postulate of the debt-deflation theory is that a redistribution of wealth from debtors to creditors is likely to be harmful to the level of activity in the actual world. As one important reason for this, debtors often have a higher propensity to spend out of wealth than creditors, e.g. because they are liquidity constrained. This claim is combined with the fact that most debt contracts are not indexed and a large part carry a fixed interest rate, to explain why the economy may be unstable in the face of large shocks and why increased price flexibility may not stabilize a closed economy.

Suggested Citation

  • Henrik Lando, 1992. "The Economic Consequences of Debt-Deflation," Palgrave Macmillan Books, in: Macroeconomic Theories and Policies for the 1990s, chapter 4, pages 53-71, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-11639-3_4
    DOI: 10.1007/978-1-349-11639-3_4
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