By Charlotta Groth of the Bank's External MPC Unit and Peter Westaway of the Bank's Monetary Analysis Division.
This article provides a brief review of issues relating to deflation. It explains what is meant by deflation, examines the historical experience and investigates what costs might be associated with deflationary episodes. It suggests that the adverse effects of deflation can be exaggerated by confusing the effects of the underlying shock with the effects of deflation per se. The costs of deflation itself are most likely to be associated with debt deflation and downward rigidities in money wages. By learning from previous episodes, it argues that deflationary episodes can be short-lived and less costly if policy responds promptly and decisively, employing the full range of conventional and unconventional monetary policy instruments.
Deflation