A Comparative Study Of Fisher And Krugman's Deflation Theory

Both inflation and deflation are very important phenomena in the macroeconomics,but compared to the studies of inflation,the academic researches of deflation are relatively little.Deflation study in the history of economic thoughts has climaxed twice,one is during the great depression in 1929 ~1933 and the other is after the bursting of Japan's bubble economy in the 1990 s,which has been more than 20 years.Irving Fisher and Paul Krugman,who are in the age of the two respectively,have done detailed researches into deflation.However,in the available literatures both two theories are understated,and there are no comparative studies either.In fact,although the historical background and the thought origin of Fisher and Krugman's deflation theories,their explanation of the causes of deflation,the governance of deflation,together with the explanation of the economic reality have things in common,there are more differences between them.Fisher analyzes the debt's important role in strengthening the deflation systematically based on his own equation from the perspective of supply.He also sets up a debt-deflationary spiral that is like a domino effect and puts forward a policy suggestion which control deflation through reflation.By contrast,Krugman explains the cause of deflation from the perspective of demand based on Keynes' s theories of “insufficient effective demand” and “liquidity trap”,and gives an aggressive monetary policy proposal,that is to raise inflation expectations and control deflation through managed inflation.By using the methods of summarizing and comparison,the dissertation systematically examines Fisher and Krugman's theories of deflation and their interpretations of economic depression reality,finds out the similarities and differences between the two economists,makes some objective evaluations,and finally provides theoretical guidance and reference for the slowing China's economy.The conclusion is that there are three things in common and three divisions between Fisher and Krugman's deflation theory.Following is the three similarities: first,they all have the same historical background and the thought origin;second,both of them affirms the positive effect of the debt on deflation;third,both regards inflation as the effective way to improve deflation.As for the differences,above all,Fisher's theory is largely based on equation in opposition to Keynes whereas Krugman has inherited Keynes' s theories of “insufficient effective demand” and “liquidity trap”.Next,Fisher explains the cause of deflation from the perspective of supply while Krugman explains from the perspective of demand,and they're fundamentally different.Eventually,the specific way to control deflation by inflation is also different.Fisher advocates using the three monetary policy tools to increase the money supply,and Krugman's argument is more radical which suggest that the central bank should set a specific inflation rate,so as to improve the public inflation expectations.