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Deflation and Monetary Policy in a Historical Perspective: Remembering the Past or Being Condemned to Repeat It?

  • Michael D. Bordo
  • Andrew Filardo

What does the historical record tell us about how to conduct monetary policy in a deflationary environment? We present a broad cross-country historical study of deflation over the past two centuries in order to shed light on current policy challenges. We first review the theoretical literature on deflation. We then characterize deflation by distinguishing among the "good, the bad and the ugly" ones - considering both empirical determinants and historical narratives of each type. Emphasis is put on the linkages between the current inflation environment and that of the gold standard period. Particular attention is also put on what the historical record reveals about policies to escape undesirable deflation. In this regard we develop a policy typology based on the relative merits of interest rate and monetary instruments in combating different types of inflation/deflation behavior.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10833.

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Date of creation: Oct 2004
Date of revision:
Publication status: published as Bordo, Michael and Andrew Filardo. "Deflation And Monetary Policy In A Historical Perspective: Remembering The Past Or Being Condemned To Repeat It?," Economic Policy, 2005, v20(44,Oct), 799-844.
Handle: RePEc:nbr:nberwo:10833
Note: DAE ME
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  1. Michael D. Bordo & Ehsan U. Choudhri & Anna J. Schwartz, 1999. "Was Expansionary Monetary Policy Feasible During the Great Contraction? An Examination of the Gold Standard Constraint," NBER Working Papers 7125, National Bureau of Economic Research, Inc.
  2. Lars E. O. Svensson, 1999. "How should monetary policy be conducted in an era of price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 195-259.
  3. Kenneth J. McLaughlin, 1999. "Are nominal wage changes skewed away from wage cuts?," Review, Federal Reserve Bank of St. Louis, issue May, pages 117-132.
  4. Ben S. Bernanke, 1994. "The Macroeconomics of the Great Depression: A Comparative Approach," NBER Working Papers 4814, National Bureau of Economic Research, Inc.
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