NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Michael D. Bordo, Andrew Filardo

NBER Working Paper No. 10833
Issued in October 2004
NBER Program(s):   DAE   ME

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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Published: 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.

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