631. Aggregate Supply-Driven Deflation and Its Implications for Macroeconomic Stability
- Author:
- David Beckworth
- Publication Date:
- 09-2008
- Content Type:
- Journal Article
- Journal:
- The Cato Journal
- Institution:
- The Cato Institute
- Abstract:
- Deflation is generally considered to be inconsistent with macroeconomic stability. Any sustained decline in the price level is widely believed to be associated with weak to negative economic growth, a lower bound of zero on the policy interest rate, and an increase in financial disintermediation. However, a number of recent studies examining both historical, cross-country experience with deflation and more recent developments find that these concerns are not necessarily associated with deflation (Selgin 1997, 1999; Cleveland Federal Reserve 1998; Stern 2003; Bordo and Redish 2004; Bordo, Lane, and Redish 2004; Bordo and Filardo 2005; Borio and Filardo 2004; Farrell 2004; King 2004; The Economist 2004, 2005; White 2006). They show that the deflationary experiences that shape the modern economic psyche, the Great Depression in the 1930s and Japan in the 1990s, are not truly representative of all deflation outcomes. These studies contend that a broader, historical perspective reveals a more nuanced view of deflation, one that requires taking seriously the possibility of both a malign deflation, a deflation originating from a collapse in aggregate demand, and a benign deflation, a deflation originating from an increase in aggregate supply.
- Political Geography:
- Japan