Aggregate Demand Contractions with Nominal Debt Commitments: Is Wage Flexibility Stabilizing?
When nominal debt payments commitments exist, output losses following an aggregate demand contraction will be larger and more persistent. Paradoxically, output can be less stable if wages are more flexible. This occurs because falling wages and prices cause debtors' cash flow to deteriorate relative to their debt commitments. To reduce the chance of incurring bankruptcy costs, debtors cut expenditure. Creditor's wealth increases from an unexpected deflation but their gain does not offset debtors' loss because of the increased threat of bankruptcy and associated costs. Net wealth and aggregate demand fall, magnifying the effect of the initial contraction. Copyright 1987 by Oxford University Press.
Year of publication: |
1987
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Authors: | Caskey, John ; Fazzari, Steven M |
Published in: |
Economic Inquiry. - Western Economic Association International - WEAI. - Vol. 25.1987, 4, p. 583-97
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Publisher: |
Western Economic Association International - WEAI |
Saved in:
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