Is this 'it'? An outline of a theory of depressions

• Main Author: FERNANDO J. CARDIM DE CARVALHO
• Format: Article
• Language: English
• Published: Editora 34 2016-09-01
• Series: Brazilian Journal of Political Economy
• Subjects: Depressão; crise financeira; corredor de estabilidade; austeridade
• Online Access: http://www.scielo.br/scielo.php?script=sci_arttext&pid=S0101-31572016000300451&lng=en&tlng=en

ABSTRACT The crisis initiated in the United States in 2007, and spread worldwide in 2008, has been compared to the Great Depression of the 1930s. They have in common a deep fall in the level of activity (although in the 2010s government intervention was able to contain the fall before it could reach the dimensions of the 1930s), followed by a period where recovery is uncertain and fragile, as has been the case both in the US and in Western Europe. The paper outlines a theory of depression that comprises both aspects. The theory draws on the theoretical contributions of Keynes, Fisher, Minsky and Leijonhufvud, proposing that the concept of "corridor of stability" may help to explain how an initial adverse aggregate shock may lead to a contractionary spiral, where debt deflation is main mechanism to explain the downward movement of the economy and why one should expect a period of weak and volatile recovery to follow it.