AGGREGATE DEMAND CONTRACTIONS WITH NOMINAL DEBT COMMITMENTS: IS WAGE FLEXIBILITY STABILIZING?

摘要: When nominal debt payments commitments exist, output losses following an aggregate demand contraction will be larger and more persistent. Paradoxically, can less stable if wages are flexible. This occurs because falling prices cause debtors' cash flow to deteriorate relative their commitments. To reduce the chance of incurring bankruptcy costs, debtors cut expenditure. Creditor's wealth increases from unexpected deflation but gain does not offset loss increased threat associated costs. Net fall, magnifying effect initial contraction.