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The most common explanation of the downward sloping to the right shape of the AD curve (as
a function of the price level), is due to real balance effects, the Direct (Pigou) RBE
and/or Indirect (Keynes or Interest Rate) RBE.  Often, of course, these are not laid out
in the textbooks, or only cursorily.  What we never get are the counter-arguments to the
RBE arguments.
 
If consumer and investor wealth is not held in cash but in other assets this should weaken
the RBE.
 
Increases in the real value of money increases the real value of debt. If household and
corporate debt is significant this should weaken the RBE.  Also, the real value of the
national debt will increase--if investors believe that is bad for the economy, regardless
of whether it is or isn't--it can dampen business expectations.
 
Consideration of expectations complicates the story.  The RBE must assume either a once
and for all drop in prices and interest rates or that investors and consumers know when
prices and interest rates have hit rock bottom.  Otherwise instead of spending and
borrowing to spend, consumers and investors will wait and watch.  Of course, this throws a
wrench into the whole story, because in the RBE prices and interest rates only stop
falling when consumers and investors spend and borrow and spend.  So they are waiting
until they stop falling and they don't stop falling as long as they are waiting and not
spending and borrowing to spend.  Of course, they will think that they hit rock bottom
before they hit zero, but how long before (how much will debt be inflated
etc.)? 
 
Falling prices could be a disincentive to sellers. 
 
The Indirect RBE reintroduces the mechanistic relation between interest rates and
investment that Keynes criticized.
 
These are all theoretical counter-arguments, there are also historical/empirical ones. 
 
During the great depression, prices and interest rates fell, but where were the real
balance effects?
 
In the Post-WWII period, we have had periods of unemployment but virtually no deflation
(in industrialized countries), as opposed to a slowing of inflation (which would only mean
a slowing of the rate at which the value of money is deteriorating).  There may be
technological and institutional reasons for this.
 
Are these counter-arguments sound? Are there others?  Why don't the textbooks include
these?
 
I believe Peter Skott or someone had an alternative explanation for the downward sloping
AD curve, based on distributional issues.
 
Mat Forstater 
 
 
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