Is deflation good or bad? Just mind the inflation gap

Marco Casiraghi and Giuseppe Ferrero

No 268, Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We explain why the macroeconomic effects of shocks to inflation of the same size, but opposite sign, are not necessarily symmetric. All in all, the costs of deflation and disinflation tend to exceed those of inflation due to the presence of constraints in the economy, namely the zero lower bound on nominal interest rates, downward nominal wage rigidity and borrowing limits. When these constraints are binding, they can prevent monetary policy from closing the inflation gap, labor market from clearing and agents from deleveraging. The impact of a disinflationary shock on the tightness of these constraints depends on the cyclical and structural conditions of the economy. We argue that it would be a mistake to assume that perverse effects can arise only with actual deflation and thus that the classification of deflationary episodes into good (supply-driven) and bad ones (demand-driven) is not only incorrect, but also misleading in terms of policy implications. Empirical evidence for the euro area suggests that the three constraints have become increasingly tight recently.

Keywords: monetary policy; unconventional monetary measures (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2015-04
New Economics Papers: this item is included in nep-cba, nep-eec, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.bancaditalia.it/pubblicazioni/qef/2015-0268/QEF_268.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bdi:opques:qef_268_15

Access Statistics for this paper

More papers in Questioni di Economia e Finanza (Occasional Papers) from Bank of Italy, Economic Research and International Relations Area Contact information at EDIRC.
Bibliographic data for series maintained by ().