The paradox of flexibility is that a debt deflation shock can create a situation where increased price and wage flexibility results in decreased total demand. This term was introduced by economists

Paul Krugman Paul Robin Krugman ( ; born February 28, 1953) is an American economist, who is Distinguished Professor of Economics at the Graduate Center of the City University of New York, and a columnist for ''The New York Times''. In 2008, Krugman was th ...

and Gauti Eggertsson in the paper ''Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach''. The term was intended to complement the " paradox of thrift", a concept resurrected by

John Maynard Keynes John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...

and Eggertsson's earlier work on the " paradox of toil". Krugman and Eggertsson proposed that the paradox of toil and the paradox of flexibility mean that wage and price flexibility do not facilitate recovery from recessions during a

liquidity trap A liquidity trap is a situation, described in Keynesian economics, in which, "after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers holding cash rathe ...

, but actually exacerbate them.

References

Keynesian economics Paradoxes in economics {{Macroeconomics-stub