Is deflation always bad for the economy?
Hi everyone,
I just used my new acquired skills to build an economic simulator to test deflation.
I wasn’t convinced defaltion was good or bad, so I built an agent-based simulation with the pieces that actually made sense to me: scarce money, rising productivity, trade, capital vs hoarding, and then the two channels everyone argues about: nominal debt and sticky wages.
Result under default params:
- Falling prices alone does not mean necessarily depression. Turn those rigid contracts off and deflation looks mostly like a simple repricing and everything is fine.
- Turn them on under a fixed money supply, and real output and survival get worse vs a price-level target (and vs the no-debt/no-sticky-wage scenario).
So the toxic combination is not a merely “Prices go down.” It’s “Prices go down while debts and wages don’t.”
I’m not claiming that this proves the real world. It’s a toy model. It was made in a couple of hours. But it made me think…
The initial question “Is deflation good or bad?” could be changed to “Deflation with which contracts, and which monetary regime can be harmful or not?”
If you wanna explore my model, I can provide the links. All free…
Write a comment