Working Paper: NBER ID: w10833
Authors: Michael D. Bordo; Andrew Filardo
Abstract: 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.
Keywords: Deflation; Monetary Policy; Historical Analysis; Economic Growth; Central Banking
JEL Codes: E31; N10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| deflation types (good, bad, ugly) (E31) | economic outcomes (F61) |
| good deflations (E31) | economic growth (O49) |
| bad deflations (E31) | recessions (E32) |
| ugly deflations (E31) | severe economic downturns (F44) |
| poor monetary policy (E49) | ugly deflations (E31) |
| tight monetary policies (E52) | deflationary environments (E31) |
| monetary conditions (E66) | historical deflations (E31) |
| institutional frameworks (D02) | historical deflations (E31) |
| monetary aggregates (E19) | deflation outcomes (E31) |
| interest rates (E43) | deflation outcomes (E31) |