The Economic Consequences of Debt-Deflation

Henrik Lando

Chapter 4 in Macroeconomic Theories and Policies for the 1990s, 1992, pp 53-71 from Palgrave Macmillan

Abstract: Abstract A central postulate of the debt-deflation theory is that a redistribution of wealth from debtors to creditors is likely to be harmful to the level of activity in the actual world. As one important reason for this, debtors often have a higher propensity to spend out of wealth than creditors, e.g. because they are liquidity constrained. This claim is combined with the fact that most debt contracts are not indexed and a large part carry a fixed interest rate, to explain why the economy may be unstable in the face of large shocks and why increased price flexibility may not stabilize a closed economy.

Keywords: Interest Rate; American Economic Review; Real Interest Rate; Government Bond; Nominal Interest Rate (search for similar items in EconPapers)
Date: 1992
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DOI: 10.1007/978-1-349-11639-3_4

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