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Asset Deflation and Financial Fragility

In: Money and Banking

Author

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  • Paul Davidson

Abstract

The purpose of this chapter is quite modest. The theoretical argument starts by accepting Keynes’s fundamental axiom that money is never neutral in an entrepreneurial economy.1 It is then possible to trace the reason why, if all prices are flexible, falling prices and especially an asset price deflation can have a devastating impact on the financial system. The result will be to lower employment and lower real economic growth. (If, on the other hand, money was really neutral, then falling prices would be the process through which the economic system would either maintain or restore full employment prosperity.)

Suggested Citation

  • Paul Davidson, 1993. "Asset Deflation and Financial Fragility," Palgrave Macmillan Books, in: Philip Arestis (ed.), Money and Banking, chapter 2, pages 7-24, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-13319-2_2
    DOI: 10.1007/978-1-349-13319-2_2
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    Cited by:

    1. Eric Tymoigne, 2006. "Asset Prices, Financial Fragility, and Central Banking," Economics Working Paper Archive wp_456, Levy Economics Institute.

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