The welfare costs of deflation

Unlike inflation, a discussion of the welfare losses associated with deflation is not overly complex. The reason is straightforward to the extent that deflation in combination with downward price stickiness leads to quantity adjustments, the welfare losses are the forgone exchanges that would have taken place if the deflation had not happened. These forgone exchange are also obvious, in that unsold goods appear on store shelves and unsold labor shows up as increases in unemployment. The...

Wage rigidity inflation and suboptimal full employment

Hutt's emphasis on the role of individual wage rates, and skepticism of aggregation in studying the labor market, led him to distinguish between 'optimal' and 'sub-optimal' situations of full employment. Optimal full employment occurs when wages are free to adjust and monetary equilibrium is being maintained. In those circumstances, workers will be able to find work, at some wage rate, in those areas where their skills lie. Capital assets will also be fully employed in the appropriate avenues...

The capital structure and Austrian business cycle theory

Consistent with our focus on the importance of intertemporal coordination, we can take our analysis of relative price effects one step further. Not only will such effects be of importance for the relative price structure at a point in time, but they will also matter for the intertemporal price structure. Some of the most significant welfare costs of inflation are those associated with the havoc it wreaks on the capital structure. Using Austrian microfoundations gives us the ability to...