Debt deflation is a mechanism in which falling prices and incomes increase the real value of nominal debt. Borrowers respond by cutting spending and selling assets, which pushes prices down further and raises the real debt burden again.

Irving Fisher described the mechanism in 1933 as an explanation for the depth of the Great Depression.[1] It can turn a recession into a prolonged contraction, especially when debt is high and monetary policy is constrained.

The IMF has studied deflation episodes and the conditions under which they become harmful.[2]

Sources

  1. Fisher, Irving. The Debt-Deflation Theory of Great Depressions. Econometrica. 1933. View source Accessed Nov 11, 2026.
  2. International Monetary Fund. Deflation: Determinants, Risks, and Policy Options. IMF. 2003. View source Accessed Nov 11, 2026.