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Deflation is better than its reputation

With unchanged or rising nominal wages, deflation hikes the real purchasing power of income, which in principle should encourage households to consume

Financial institutions enjoy the luxury of liquidity. They can go for balance sheet improvement or lending to the business sector. Deflation in itself does not play any significant role in their choice.

ECONOMIC theory tells us that deflation is bad. Rising real value of debt soaks money out of the system instead of boosting consumption or investment. That may be correct as a partial analysis, but a general analysis is more complex and does not warrant such hasty judgement.


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