Deflation and Monetary Policy

Deflation has replaced inflation as the principal challenge for monetary policy in many countries. But influential voices question whether deflation is properly seen as a problem for economic growth and financial stability. They question whether recent experience with deflation is more than a transitory phenomenon associated with the aftermath of the financial crisis and record-low oil prices. And they doubt whether monetary policy can be used to address the deflation problem without creating even more serious risks. Historical experience as I read it generally confirms that deflation is a problem whose solution should be a priority for central banks. Japan's experience in particular suggests that deflation problems do not solve themselves. The jury is still out on whether, once deflation is underway, concerted monetary policy action can return inflation to its positive target levels. My own view is that it can. If the policies to date have not achieved their goal, then the central bank or banks in question need to do more. If doing more threatens financial stability, then tools other than monetary policy -- so-called macroprudential tools -- are appropriate for addressing these risks. If a central bank runs out of government securities to buy or worries about dangerously reducing the liquidity of the government bond market, then it can buy other assets. The policy response to deflation is straightforward. The only question is whether the relevant authorities will pursue it.