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Deflation fears in developed economies

Author

Listed:
  • István Ábel

    (Magyar Nemzeti Bank (Central Bank of Hungary))

  • Kristóf Lehmann

    (Magyar Nemzeti Bank (Central Bank of Hungary))

  • Gergõ Motyovszki

    (Magyar Nemzeti Bank (Central Bank of Hungary))

  • Zoltán Szalai

    (Magyar Nemzeti Bank (Central Bank of Hungary))

Abstract

Fears of deflation in the euro area intensified in early 2014. Low or negative inflation in several euro-area countries has increased the risk of deflation. The European Central Bank’s communication suggests that the Bank considers deflation a genuine risk. In Japan, economic policy has been struggling with deflation for over a decade now and has recently introduced a number of quantitative and qualitative easing measures. While Hungary is not directly threatened by deflation risks, persistent deflation in the euro area and the associated stagnation would have an adverse effect on this country as well. In this article, we explain that a decrease in price levels does not in itself constitute deflation. By contrast, if the decrease in prices is extensive and sustained and if it is incorporated into expectations, and if a liquidity trap constrains the scope of monetary policy and there is a genuine risk of a debt spiral, then there is a danger of deflation.

Suggested Citation

  • István Ábel & Kristóf Lehmann & Gergõ Motyovszki & Zoltán Szalai, 2014. "Deflation fears in developed economies," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 9(2), pages 7-17, July.
    • Handle: RePEc:mnb:bullet:v:9:y:2014:i:2:p:7-17
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    File URL: https://www.mnb.hu/letoltes/abel-lehmann-motyovszki-szalai.pdf
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    Cited by:

    1. István Ábel & Orsolya Csortos & Kristóf Lehmann & Annamária Madarász & Zoltán Szalai, 2014. "Inflation targeting in the light of lessons from the financial crisis," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 13(4), pages 35-56.

    More about this item

    Keywords

    financial crisis; deflation; monetary policy;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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