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Deflation and monetary policy

In: Economic Stagnation in Japan

Author

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  • Barry Eichengreen

Abstract

There is little agreement about deflation as a problem for economic growth and financial stability. Economists may question it as a transitory phenomenon or whether monetary policy can solve it without more serious risks. Historical experience generally confirms that it should be a central-bank priority and does not solve itself. Once deflation is under way, monetary policy can return inflation to positive target levels. If that is not achieved, banks need to do more. If doing more threatens financial stability, macroprudential tools are appropriate. If a central bank runs out of government securities to buy or worries about liquidity in the government bond market, there are other assets to buy. If it worries about purchasing other assets, a helicopter drop of money is an option. If that drop targets productive public infrastructure investments, they not only can proceed without increasing public debt but also can actually reduce it.

Suggested Citation

  • Barry Eichengreen, 2018. "Deflation and monetary policy," Chapters, in: Dongchul Cho & Takatoshi Ito & Andrew Mason (ed.), Economic Stagnation in Japan, chapter 9, pages 183-201, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:17837_9
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    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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