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Deflation, Recession and Slowing Growth: Finding the Empirical Links

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  • Federico Guerrero
  • Elliott Parker

Abstract

Does price deflation cause recession? Though deflation has become a matter of concern for the Federal Reserve, recent studies suggest that the historical and causal record is mixed. In this article, the authors use historical data for the output and price level of the United States of America, and find that a simple Granger causality approach confirms the doubts about the effect. A closer look, however, shows that while deflation alone may not cause recession, but when combined with recession, it may cause lower subsequent growth. Although interaction can lead to a downward spiral of output and prices, the authors find that they dissipate with time.

Suggested Citation

  • Federico Guerrero & Elliott Parker, 2006. "Deflation, Recession and Slowing Growth: Finding the Empirical Links," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(1), pages 37-49, February.
    • Handle: RePEc:icf:icfjmo:v:04:y:2006:i:1:p:37-49
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    Citations

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    Cited by:

    1. Craighead, William D. & Tien, Pao-Lin, 2015. "Nominal shocks and real exchange rates: Evidence from two centuries," Journal of International Money and Finance, Elsevier, vol. 56(C), pages 135-157.
    2. Lukáš Kovanda & Martin Komrska, 2017. "Deflace, odklad spotřeby a hospodářské krize: rétorika centrálních bank vs. ekonomická literatura [Deflation and Economic Crisis: Central Banks' Rhetoric vs. Economic Literature]," Politická ekonomie, Prague University of Economics and Business, vol. 2017(3), pages 351-369.
    3. Davis, J. Scott, 2015. "The asymmetric effects of deflation on consumption spending: Evidence from the great depression," Economics Letters, Elsevier, vol. 130(C), pages 105-108.
    4. Faugere, Christophe, 2010. "Macrofoundations for A (Near) 2% Inflation Target," MPRA Paper 23491, University Library of Munich, Germany, revised 25 Jun 2010.
    5. Helder Ferreira de Mendonça & Diogo Martins Esteves, 2018. "Monetary authority's transparency and income inequality," Review of Development Economics, Wiley Blackwell, vol. 22(4), pages 202-227, November.
    6. Bans-Akutey, Mawufemor & Yaw Deh, Isaac & Mohammed, Faisal, 2016. "What is the effect of Inflation on Manufacturing Sector Productivity in Ghana?," MPRA Paper 75145, University Library of Munich, Germany.

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