Abstract
This paper provides a detailed exposition of Irving Fisher’s debt-deflation theory as well as its proposed “remedies” against the “vicious cycle”. We argue, using F. A. Hayek’s hypothesis of “dichotomy of rates of interest”, that not only may be the main proposed tool of battling debt-deflation, i.e. preventing the price level from falling, considered self-defeating, in the long run at least, but also that goals of the macroprudential policy and the policy of inflation targeting are inherently incompatible if Fisher’s and Hayek’s theories are taken into account.
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Notes
- 1.
A comprehensive evolution and analysis may be found in Brunnermeier (2009).
- 2.
We are referring to so called “New Consensus”, which the monetary theory of inflation targeting is based on, and to the theory of efficient markets.
- 3.
- 4.
Fisher quotes, then, one of the greatest experts in the field of business cycles, however he does not provide the name. It is possible that it was W.C. Mitchell, whom the book is dedicated to.
- 5.
Fisher distinguished “forced” and “free” tendencies; the latter being endogenous and the former exogenous in respect of an economy (1932, pp. 51–53).
- 6.
- 7.
A thorough discussion of the “starters” (of debt-deflation) may be found in Fisher (1932, pp. 44–50).
- 8.
The outline of possible chronological order is provided in an appendix, see Fisher (ibid., pp. 161–162).
- 9.
For the original discussion, see Fisher (1933, pp. 8–30).
- 10.
Consult Fisher (1932, pp. 113–142) for more details.
- 11.
- 12.
It ought to be noted, however, that Hayek’s discussion revolves mainly around the problem of maintaining the neutrality of money. Nevertheless, for purposes of this paper, we shall omit this fact as it does not affect our aim.
- 13.
The never ending and excessive discussion of Federal Reserve’s decision to raise federal-funds rate is an excellent example.
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Acknowledgments
This paper has been prepared under financial support of Internal Grant Agency of the University of Economics, Prague under a research project no. F1/5/2014 “Financial and Economic Cycles”, which author gratefully acknowledges.
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Metrah, S. (2017). The Theory of Debt-Deflation: A Possibility of Incompatibility of Goals of Monetary Policy. In: Procházka, D. (eds) New Trends in Finance and Accounting . Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-319-49559-0_4
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