Debt-Deflation: Concepts, and a Stylised Model
This paper proposes a model of how agents adjust their asset holdings in response to losses in general equilibrium. By emphasising the relation between deflation and financial distress, we capture some original features of the early debt-deflation literature, such as distress selling, instability, and endogenous monetary contraction. The agents affected by a shock sell off assets to prevent their debt from crowding out consumption. But their distress-selling causes a decline in equilibrium prices, and the resulting losses elicit reactions by all agents. This activates several channels of debt-deflation. Yet we show that this process remains stable, even in the presence of large shocks, high indebtedness, and wide-spread default. What keeps the asset market stable is the presence of agents without prior debt or losses, who borrow to exploit the expected asset price recovery. By contrast, debt-deflation becomes unstable when agents try to contain their indebtedness, or when a credit crunch interferes with the accommodation necessary for stability.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- James Tobin, 1975.
"Keynesian Models of Recession and Depression,"
Cowles Foundation Discussion Papers
387, Cowles Foundation for Research in Economics, Yale University.
- Bernanke, B. & Gertler, M. & Gilchrist, S., 1998.
"The Financial Accelerator in a Quantitative Business Cycle Framework,"
98-03, C.V. Starr Center for Applied Economics, New York University.
- Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
- Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
- Charles W. Calomiris & R. Glenn Hubbard, 1989. "Price Flexibility, Credit Availability, and Economic Fluctuations: Evidence from the United States, 1894–1909," The Quarterly Journal of Economics, Oxford University Press, vol. 104(3), pages 429-452.
- Michael D. Bordo & Andrew Filardo, 2004.
"Deflation and Monetary Policy in a Historical Perspective: Remembering the Past or Being Condemned to Repeat It?,"
NBER Working Papers
10833, National Bureau of Economic Research, Inc.
- Michael Bordo & Andrew Filardo, 2005. "Deflation and monetary policy in a historical perspective: remembering the past or being condemned to repeat it?," Economic Policy, CEPR;CES;MSH, vol. 20(44), pages 799-844, October.
- Christiano, Lawrence & Motto, Roberto & Rostagno, Massimo, 2004.
"The Great Depression and the Friedman-Schwartz hypothesis,"
Working Paper Series
0326, European Central Bank.
- Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2003. "The Great Depression and the Friedman-Schwartz hypothesis," Proceedings, Federal Reserve Bank of Cleveland, pages 1119-1215.
- Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2004. "The Great Depression and the Friedman-Schwartz Hypothesis," NBER Working Papers 10255, National Bureau of Economic Research, Inc.
- Lawrence J. Christiano & Roberto Motto, 2004. "The Great Depression and the Friedman-Schwartz Hypothesis," Computing in Economics and Finance 2004 169, Society for Computational Economics.
- Lawrence J. Christiano & Roberto Motto & Massimo Rostagno, 2004. "The Great Depression and the Friedman-Schwartz hypothesis," Working Paper 0318, Federal Reserve Bank of Cleveland.
- Holmstrom, B & Tirole, J, 1996.
"Private and Public Supply of Liquidity,"
96-21, Massachusetts Institute of Technology (MIT), Department of Economics.
- Milton Friedman, 1971.
"A Theoretical Framework for Monetary Analysis,"
National Bureau of Economic Research, Inc, number frie71-1.
- Bernanke, Ben & Gertler, Mark, 1989. "Agency Costs, Net Worth, and Business Fluctuations," American Economic Review, American Economic Association, vol. 79(1), pages 14-31, March.
- J. Bradford DeLong, 1999. "Should We Fear Deflation?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1), pages 225-252.
- Philip Lowe & Claudio Borio, 2002. "Asset prices, financial and monetary stability: exploring the nexus," BIS Working Papers 114, Bank for International Settlements.
- Duncan K. Foley, 2001.
"Hyman Minsky and the dilemmas of contemporary economic method,"
in: Financial Keynesianism and Market Instability, chapter 3
Edward Elgar Publishing.
- Duncan K. Foley, 2010. "Hyman Minsky and the Dilemmas of Contemporary Economic Method," Chapters, in: The Elgar Companion to Hyman Minsky, chapter 9 Edward Elgar Publishing.
- De Long, James Bradford & Summers, Lawrence H, 1986.
"Is Increased Price Flexibility Stabilizing?,"
American Economic Review,
American Economic Association, vol. 76(5), pages 1031-44, December.
- Michael D. Bordo & David C. Wheelock, 1998. "Price stability and financial stability: the historical record," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 41-62.
- Hyman P. Minsky, 1992. "The Financial Instability Hypothesis," Economics Working Paper Archive wp_74, Levy Economics Institute.
- Todd C. Pulvino, 1998. "Do Asset Fire Sales Exist? An Empirical Investigation of Commercial Aircraft Transactions," Journal of Finance, American Finance Association, vol. 53(3), pages 939-978, 06.
- McAndrews James J. & Roberds William, 1995.
"Banks, Payments, and Coordination,"
Journal of Financial Intermediation,
Elsevier, vol. 4(4), pages 305-327, October.
- King, Mervyn, 1994. "Debt deflation: Theory and evidence," European Economic Review, Elsevier, vol. 38(3-4), pages 419-445, April.
- Jean-Michel Grandmont & Guy Laroque, 1975.
"On Money and Banking,"
Review of Economic Studies,
Oxford University Press, vol. 42(2), pages 207-236.
- Andrew Filardo & Claudio E. V. Borio, 2004. "Back to the future? Assessing the deflation record," BIS Working Papers 152, Bank for International Settlements.
- Thomas M. Humphrey, 2003. "Classical deflation theory," Working Paper 03-13, Federal Reserve Bank of Richmond.
- Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
- Bernanke, Ben S, 1983.
"Nonmonetary Effects of the Financial Crisis in Propagation of the Great Depression,"
American Economic Review,
American Economic Association, vol. 73(3), pages 257-76, June.
- Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
- Brown, David T. & James, Christopher M. & Mooradian, Robert M., 1994. "Asset sales by financially distressed firms," Journal of Corporate Finance, Elsevier, vol. 1(2), pages 233-257, August.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:0505001. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.