Keynesian Models of Deflation and Depression Revisited: Inside Debt and Price Flexibility

Thomas Palley

Working Papers from Political Economy Research Institute, University of Massachusetts at Amherst

Abstract: 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.

Keywords: deflation; liquidity trap; Fisher debt effect; price flexibility (search for similar items in EconPapers)
JEL-codes: E30 E31 (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-hpe, nep-mac and nep-pke
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Citations: View citations in EconPapers (15)

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