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A Model of Debt Deflation and the Phillips Curve: Implications for Business Cycles and the Balance Sheet Channel of Monetary Policy

Arnold, Lutz G.


Abstract

New Keynesian economics stresses the positive link between firms' net worth, on the one hand, and the equilibrium level of credit granted and aggregate employment, on the other hand. The present paper argues that once money is introduced and adaptive inflation expectations are assumed, an accelerationist Phillips curve emerges: because of debt deflation, an increase in the rate of inflation ...

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