Afternoon Must-Read: Paul Krugman (2010): Mysteries Of Deflation

…in the 60s, applied macroeconomics has relied on some kind of inflation-adjusted Phillips curve…. But here’s the thing: the [Friedman-Phelps] inflation-adjusted Phillips curve predicts not just deflation, but accelerating deflation in the face of a really prolonged economic slump…. This doesn’t happen…. So what’s going on? There’s a body of work I’m surprised we haven’t been hearing more about: the downward nominal wage rigidity literature. I learned about the concept from Pierre Fortin; Mr. Janet Yellin, aka George Akerlof, and co-authors wrote quite a lot about it…. It’s important to take account of downward rigidity so as not to get fooled into accepting a persistently depressed economy as normal…. It’s time to start focusing on downward rigidity and what it implies. After all, all indications are that we’re going to be dealing with a depressed economy for a long time to come.