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Back to the future? Assessing the deflation record

  • Andrew Filardo
  • Claudio E. V. Borio

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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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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  1. Laurence Ball, 2000. "Near-Rationality and Inflation in Two Monetary Regimes," Economics Working Paper Archive 435, The Johns Hopkins University,Department of Economics.
  2. 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.
  3. 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.
  4. 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.
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  7. 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, July.
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  11. Burdekin, Richard C K & Siklos, Pierre L, 1999. "Exchange Rate Regimes and Shifts in Inflation Persistence: Does Nothing Else Matter?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(2), pages 235-47, May.
  12. repec:cup:cbooks:9780521780254 is not listed on IDEAS
  13. Mitsuhiro Fukao, 2003. "Financial strains and the zero lower bound: the Japanese experience," BIS Working Papers 141, Bank for International Settlements.
  14. Charles Bean, 2003. "Asset prices, financial imbalances and monetary policy: are inflation targets enough?," BIS Working Papers 140, Bank for International Settlements.
  15. Victor Zarnowitz, 1992. "Business Cycles: Theory, History, Indicators, and Forecasting," NBER Books, National Bureau of Economic Research, Inc, number zarn92-1, July.
  16. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, July.
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