NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Deflation: Prevention and Cure

Willem H. Buiter

NBER Working Paper No. 9623
Issued in April 2003
NBER Program(s):   IFM   ME

After an absence of almost half a century, the spectre of deflation is once again haunting the corridors of central banks and finance ministries in the industrial world. While preventing or combating deflation poses some unique difficulties not present in preventing or combating inflation, deflation can be prevented and, if it has taken hold, can be overcome, using conventional instruments of monetary and fiscal policy. These include open market purchases of government securities and monetary financing of government deficits caused by expansionary fiscal measures. Base money-financed tax cuts or transfer payments -- the mundane version of Friedman's helicopter drop of money -- will always boost aggregate demand. Unconventional monetary and fiscal measures are also available. These include open market purchases of private and foreign securities, negative nominal interest rates (through a carry tax on currency) and temporary tax measures aimed at shifting private consumption from the future to the present, by tilting the intertemporal terms of trade. An example is a cut in VAT today coupled to the credible commitment of a VAT increase in the future. Deflation results from a combination of bad luck and poor economic management, including the failure to coordinate monetary and fiscal policy. Sustained unwanted deflation is evidence of policy failure. Both the knowledge and the tools exist to prevent unwanted deflation.

download in pdf format
   (1177 K)

email paper

This paper is available as PDF (1177 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w9623

Users who downloaded this paper also downloaded these:
Ito and Mishkin w10878 Two Decades of Japanese Monetary Policy and the Deflation Problem
Bordo and Filardo w10833 Deflation and Monetary Policy in a Historical Perspective: Remembering the Past or Being Condemned to Repeat It?
Ito w10818 Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting?
Bordo, Landon-Lane, and Redish w10329 Good versus Bad Deflation: Lessons from the Gold Standard Era
Eggertsson and Woodford w9968 Optimal Monetary Policy in a Liquidity Trap
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us