Appendix to Deflation: Prevention and Cure

This Appendix provides some technical background for Buiter [2003]. Households First, I consider the individual consumption behaviour of households that operate in perfect financial markets and can borrow freely against the security of their future disposable labour income. In the body of the paper these are called permanent income consumers. Next aggregate consumption is derived on the assumption that all consumers are permanent income consumers. The final step is to derive aggregate consumption behaviour when a constant fraction of households is constrained to consume their disposable (after-tax) labour income in each period. The second category of consumers are called ‘Keynesian’ consumers in the body of the paper. A representative member of the generation born in period t-s, 0 s ≥ , maximizes at time t the expected utility of life-time sequences of consumption of domestic goods, imported goods and real money balances. The objective functional