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Understanding Deflation: Treating the Disease, Not the Symptoms

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  • Dimitri B. Papadimitriou
  • L. Randall Wray

Abstract

Deflation can be defined as a falling general price level utilizing one of the common price indices.the consumer price index; the GDP deflator or other, narrower indices as the wholesale price index; or an index of manufactured goods prices. Falling indices of output prices can be the result of several mechanisms: productivity increases, quality increases and hedonic imputations of prices, competition from low-cost producers, government policy influences, or depressed aggregate demand. Falling output prices, in turn, can have strong effects, especially on the ability to service debts fixed in nominal terms; depending on the level of indebtedness of households and firms, they can set off a classic Minsky-Fisher debt deflation spiral. In this paper, we argue that deflation can and usually does generate large economic and social costs, but it is more important to understand that deflation itself is a symptom of severe and chronic economic problems. This distinction becomes important for the design and implementation of economic policy.

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  • Dimitri B. Papadimitriou & L. Randall Wray, 2003. "Understanding Deflation: Treating the Disease, Not the Symptoms," Economics Working Paper Archive wp_392, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_392
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    1. Wynne Godley & L. Randall Wray, "undated". "Can Goldilocks Survive?," Economics Policy Note Archive 99-4, Levy Economics Institute.
    2. Dimitri B. Papadimitriou & Anwar Shaikh & Claudio H. dos Santos & Gennaro Zezza, 2002. "Is Personal Debt Sustainable?," Economics Strategic Analysis Archive 02-11, Levy Economics Institute.
    3. Dimitri B. Papadimitriou & L. Randall Wray, "undated". "What to Do with the Surplus: Fiscal Policy and the Coming Recession," Economics Policy Note Archive 98-6, Levy Economics Institute.
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    1. L. Randall Wray, "undated". "Deflation Worries," Economics Policy Note Archive 03-5, Levy Economics Institute.

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