Abstract
Beginning no later than Mises’s The Theory of Money and Credit in 1912, the causes and consequences of inflation have been a central concern of the Austrian School of Economics. Unfortunately, that has meant relatively few analyses of the problems of deflation from a distinctly Austrian perspective. Deflation has dangers of its own, and there are important insights that are unique to the Austrian tradition that can add to our understanding of those dangers. This paper explores those dangers, both at the broad macroeconomic level and at a more microeconomic level by integrating the Austrian theory of capital with the monetary equilibrium theory account of deflation. Austrian concerns about inflation should not lead them to overlook the very real dangers of deflation.
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Notes
Although I will not deal directly with their call for targeting in NGDP in what follows, I do wish to note that the Market Monetarists open a door for an Austrian discussion of deflation by sharing many of the points of theory that I will be addressing. On Market Monetarism, see many of the essays in Beckworth (2012).
An excess supply of money is how inflation is defined using a monetary equilibrium approach.
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Prepared for a symposium on Austrian Economics in the Atlantic Economic Journal
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Horwitz, S. The Dangers of Deflation. Atl Econ J 42, 143–151 (2014). https://doi.org/10.1007/s11293-014-9406-6
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DOI: https://doi.org/10.1007/s11293-014-9406-6