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Back to the future? Assessing the deflation record

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  • Andrew Filardo
  • Claudio E. V. Borio
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    Abstract

    The rhetoric of deflation has become more prevalent in policy circles and in the press despite the fact that deflation has been a rare phenomenon in modern fiat currency economies. To better understand the nature of deflation, this paper looks back to a period when deflation was a regular feature of the economic environment, across both time and a wide set of countries. One feature of the deflation record stands clear. During the 19th century and early 20th century, deflation was not generally associated with persistent and deep economic malaise. Most periods of deflation also appear to have been largely unanticipated, with interest rates rarely approaching their zero lower bound. One notable exception to this typical pattern was the Great Depression of the early 1930s, the event that nowadays colours current general perceptions of what deflationary episodes might look like. At the risk of oversimplification, one way to think about this broad sweep of history is that deflations come in three basic types: the good, the bad and the ugly. The paper then jumps forward in time, seeking to draw lessons from the past about the possibility of future episodes of deflation and their characteristics. In doing so, it pays particular attention to the similarities and differences in the monetary and financial regimes prevailing now and in the past. While great care should be taken in any such exercise, the paper concludes that certain features of the past can help to shed some light on the policy challenges that policymakers might face in the future.

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    Bibliographic Info

    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 152.

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    Length: 61 pages
    Date of creation: Mar 2004
    Date of revision:
    Handle: RePEc:bis:biswps:152

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    Keywords: Back to the future? Assessing the deflation record;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Christopher Hanes & John A. James, 2003. "Wage Adjustment Under Low Inflation: Evidence from U.S. History," American Economic Review, American Economic Association, vol. 93(4), pages 1414-1424, September.
    2. Charles Bean, 2003. "Asset prices, financial imbalances and monetary policy: are inflation targets enough?," BIS Working Papers 140, Bank for International Settlements.
    3. Barry Eichengreen, 1992. "Golden Fetters: The Gold Standard and the Great Depression, 1919-1939," NBER Books, National Bureau of Economic Research, Inc, number eich92-1, August.
    4. Victor Zarnowitz, 1992. "Business Cycles: Theory, History, Indicators, and Forecasting," NBER Books, National Bureau of Economic Research, Inc, number zarn92-1, August.
    5. Mitsuhiro Fukao, 2006. "Financial Strains and the Zero Lower Bound: The Japanese Experience," NBER Chapters, in: Monetary Policy under Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15, pages 203-232 National Bureau of Economic Research, Inc.
    6. Eugene N. White & John Landon-Lane & Adam Klug, 2002. "How Could Everyone Have Been So Wrong? Forecasting The Great Depression With The Railroads," Departmental Working Papers 200209, Rutgers University, Department of Economics.
    7. Corrinne Ho & Robert N. McCauley, 2003. "Living with flexible exchange rates: issues and recent experience in inflation targeting emerging market economies," BIS Working Papers 130, Bank for International Settlements.
    8. Michael D. Bordo & John Landon Lane & Angela Redish, 2004. "Good versus Bad Deflation: Lessons from the Gold Standard Era," NBER Working Papers 10329, National Bureau of Economic Research, Inc.
    9. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, August.
    10. Takeshi Kimura & Hiroshi Kobayashi & Jun Muranaga & Hiroshi Ugai, 2003. "The effect of the increase in the monetary base of Japan's economy at zero interest rates: an empirical analysis," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 276-312 Bank for International Settlements.
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    Citations

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    Cited by:
    1. Borio, Claudio & Filardo, Andrew J., 2004. "Looking back at the international deflation record," The North American Journal of Economics and Finance, Elsevier, vol. 15(3), pages 287-311, December.
    2. Goetz von Peter, 2005. "Debt-Deflation: Concepts, and a Stylised Model," Macroeconomics 0505001, EconWPA.

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