Recovering effectiveness of monetary policy under a deflationary environment

This paper presents a Keynesian model where a fall in autonomous demand could imply a fall in prices that deepens the initial recession, even in the presence of flexible prices, flexible wages, and free market forces. In other words, the hypothesis of fully flexible prices and wages is insufficient for the original equilibrium to return in an environment with liquidity preference of economic agents. The findings denote that fiscal policy would be an important instrument in stabilizing expectations, prices, and output, preventing the economy from deflationary evil.