Markdown not creating paragraphs

I installed the marksmarty module and set it as the default filter. It applies inline styles (em and strong) and correctly creates links, but it doesn't turn double-newline-separated blocks of text into paragraphs. All the text just runs together as one big paragraph. Adding many newlines between paragraphs didn't work, either.

I tried debugging it with debug statements the devel module, which confirmed that the Markdown($text) method is, in fact, getting called. But then new updates I made the module didn't show up -- maybe a cache problem or something, though doing "empty cache" via the devel module didn't help. I haven't developed with Drupal before, so I don't know my way around yet.

Since automatically creating paragraphs is a major part of Markdown, I assume that a true bug like this wouldn't go unnoticed. So, the problem is likely in my setup somehow, but I don't know how to debug it further.

Any help would be appreciated.

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AA