Download This PaperDebt Deflation Traps within Small Open Economies: A Stock-Flow Consistent Perspective
CONTRIBUTIONS IN STOCK-FLOW CONSISTENT MODELING: ESSAYS IN HONOR OF WYNNE GODLEY, Dimitri B. Papadimitriou, Gennaro Zezza, eds., Palgrave Macmillan, 2011
34 Pages Posted: 13 Oct 2011
Date Written: October 11, 2011
Abstract
The aim of this chapter is to map out the macroeconomic effects of a sustained debt-deflation within a small open economy. We build a 2 country stock flow consistent model, and show the effects of a debt-deflation cycle on households, firms, banks, the government, and the central bank in each country. We find price collapses across the economy can sustain a downturn, even as other areas of the economy experience a return to growth. Within a currency union, with one small country experiencing a deflation, only transfers from the larger country, and increased government expenditure, can bring the economy out of a deflationary spiral.
Keywords: Debt, Deflation, Small Open Economy
JEL Classification: E32, E37, E51, G33
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