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Debt deflation worries: a restatement

Lino Sau

Keywords: financial fragility; banking crisis; sovereign crisis; debt deflation

Abstract

There has recently been a marked increase in debt deflation worries, particularly in the eurozone. This is the second time in recent years that widespread interest in this serious economic phenomenon has come to the fore, the first being during and in the aftermath of the Asian crisis and Japan's great stagnation, the second as a consequence of the current financial turmoil which stemmed from the US, later propagating in Europe. After an overview of the relevant insights by the debt deflation school, in this paper my aim is to update these analyses and findings to understand the causes and consequences of the current debt deflation process. The paper is structured thus: after an introduction, in Section 2 I take a critical look back at the debt deflation school, taking into consideration the seminal contributions and the extensions stemming from them in the literature; in Section 3, I consider the US financial crisis and EU contagion; I then go on, in Section 4, to see how debt deflation theories fare in the context of the present scenario in the EU, after which I draw my conclusions.

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