Understanding Deflation: Treating the Disease, Not the Symptoms

L. Randall Wray and Dimitri Papadimitriou

Economics Public Policy Brief Archive from Levy Economics Institute

Abstract: Most recent discussions of deflation seem to overlook the main dangers posed by a deflationary economy and appear to offer superficial solutions. L. Randall Wray and Dimitri B. Papadimitriou argue in this brief that, barring drastic changes in asset and output prices, deflation itself is not the main problem, but rather the recessionary conditions that sometimes give rise to deflation. Whether or not prices are falling, the proper remedy for a recession is the Keynesian one: government deficit spending, used to finance useful programs and tax cuts. These measures will reduce unemployment, increase growth, and relieve deflationary pressures.

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Working Paper: Understanding Deflation: Treating the Disease, Not the Symptoms (2003)
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