Keynesian Models of Deflation and Depression Revisited: Inside Debt and Price Flexibility
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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- 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.
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- Palley, Thomas I., 1999. "General disequilibrium analysis with inside debt," Journal of Macroeconomics, Elsevier, vol. 21(4), pages 785-803.
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1686, National Bureau of Economic Research, Inc.
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American Economic Association, vol. 65(2), pages 195-202, May.
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