Asset Deflation and Financial Fragility

Paul Davidson

Chapter 2 in Money and Banking, 1993, pp 7-24 from Palgrave Macmillan

Abstract: Abstract The purpose of this chapter is quite modest. The theoretical argument starts by accepting Keynes’s fundamental axiom that money is never neutral in an entrepreneurial economy.1 It is then possible to trace the reason why, if all prices are flexible, falling prices and especially an asset price deflation can have a devastating impact on the financial system. The result will be to lower employment and lower real economic growth. (If, on the other hand, money was really neutral, then falling prices would be the process through which the economic system would either maintain or restore full employment prosperity.)

Keywords: Financial Asset; Nominal Wage; Flexible Exchange Rate; Money Income; Real Capital (search for similar items in EconPapers)
Date: 1993
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DOI: 10.1007/978-1-349-13319-2_2

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