Perils of price deflations: an analysis of the Great Depression

Charles Carlstrom and Timothy Fuerst

Economic Commentary, 2001, issue Feb

Abstract: If a central bank adopted a zero inflation target, it would, in practice, occasionally deviate up and down from that rate, and the economy would experience episodes of mild inflation and deflation. Is deflation-a decrease in the level of prices-a cause for concern? Deflation can cause output to decline, but to what extent? This Economic Commentary explores how much of a problem deflation might be for modern economies by estimating the effect of massive price declines on output during the Great Depression. The authors find that while deflation can cause output to decline, mild episodes of deflation are unlikely to be a problem.

Keywords: Depressions; Deflation (Finance) (search for similar items in EconPapers)
Date: 2001
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