Was monetary policy optimal during past deflation scares?
Countries around the world have fallen into one of the deepest recessions since the Great Depression—a recession exacerbated by a severe financial crisis. Among the challenges that face monetary policymakers in such uncertain times is the danger that economies worldwide, including the United States, Japan, and the Euro Area, may enter a period of deflation, in which the prices of goods and services fall relentlessly. ; Policymakers and economists agree that sustained deflation would likely worsen the already fragile economic and financial environment. Past episodes of deflation in the wake of financial crises have included falling asset values, collapsing business and consumer confidence, credit crunches, widespread bankruptcies, long-lasting surges in unemployment, and other adverse conditions. Moreover, a deflationary environment has the potential to complicate the conduct of monetary policy. ; Policymakers have responded vigorously to the current crisis to prevent deflation. Some analysts warn that the U.S. policy response might be too proactive and cause a subsequent surge in inflation. At the same time, other analysts advise that the policy response in many other countries might not be active enough to fend off deflation. Of course, it is too early to judge the success of the different policies in the current episode. Still, it is possible to learn from past attempts by policymakers to fend off deflation under similar economic circumstances. ; Billi shows how Taylor rules can be used to evaluate monetary policy. He then compares actual policy during past deflation scares—in Japan in the 1990s and in the United States in the 2000s—with how policy would have been conducted using Taylor rules based, to the extent possible, on data available at the time. The rule-based evidence suggests that Japan’s monetary policy response during its deflation scare might have been too weak, while the U.S. response might have been too strong.
Volume (Year): (2009)
Issue (Month): Q III ()
|Contact details of provider:|| Postal: |
Phone: (816) 881-2254
Web page: http://www.kansascityfed.org
More information through EDIRC
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:fip:fedker:y:2009:i:qiii:p:67-98:n:v.94no.3. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LDayrit)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.