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Asset Deflation and Financial Fragility

In: Uncertainty, International Money, Employment and Theory

Author

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  • Louise Davidson

Abstract

The purpose of this paper 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 out why, if all prices are flexible, falling prices and especially an asset price deflation can have a devastating impact on the financial system and permanently lower employment and real economic growth. (If, on the other hand, money was neutral, then falling prices would be the process through which the economic system either maintains or restores full employment prosperity.)

Suggested Citation

  • Louise Davidson, 1999. "Asset Deflation and Financial Fragility," Palgrave Macmillan Books, in: Louise Davidson (ed.), Uncertainty, International Money, Employment and Theory, chapter 18, pages 232-245, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-14991-9_18
    DOI: 10.1007/978-1-349-14991-9_18
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    Cited by:

    1. Eric Tymoigne, 2006. "Asset Prices, Financial Fragility, and Central Banking," Economics Working Paper Archive wp_456, Levy Economics Institute.

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