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Keynesian Models of Deflation and Depression Revisited: Inside Debt and Price Flexibility

  • Thomas I. Palley

This 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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File URL: http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_151-200/WP169.pdf
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Paper provided by Political Economy Research Institute, University of Massachusetts at Amherst in its series Working Papers with number wp169.

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Date of creation: 2008
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Handle: RePEc:uma:periwp:wp169
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  1. Caskey, John & Fazzari, Steven M, 1987. "Aggregate Demand Contractions with Nominal Debt Commitments: Is Wage Flexibility Stabilizing?," Economic Inquiry, Western Economic Association International, vol. 25(4), pages 583-97, October.
  2. Tobin, James, 1981. "Money and Finance in the Macro-Economic Process," Nobel Prize in Economics documents 1981-1, Nobel Prize Committee.
  3. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
  4. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
  5. Palley, Thomas I., 1999. "General disequilibrium analysis with inside debt," Journal of Macroeconomics, Elsevier, vol. 21(4), pages 785-803.
  6. J. Bradford De Long & Lawrence H. Summers, 1985. "Is Increased Price Flexibility Stabilizing?," NBER Working Papers 1686, National Bureau of Economic Research, Inc.
  7. William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
  8. Tobin, James, 1975. "Keynesian Models of Recession and Depression," American Economic Review, American Economic Association, vol. 65(2), pages 195-202, May.
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