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Deflation fears in developed economies

Istvan Abel, Kristóf Lehmann (), Gergő Motyovszki and Zoltán Szalai ()
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Kristóf Lehmann: Magyar Nemzeti Bank (Central Bank of Hungary)
Zoltán Szalai: Magyar Nemzeti Bank (Central Bank of Hungary)

MNB Bulletin (discontinued), 2014, vol. 9, issue 2, 7-17

Abstract: Fears of deflation in the euro area intensified in early 2014. Low or negative inflation in several euro-area countries has increased the risk of deflation. The European Central Bank’s communication suggests that the Bank considers deflation a genuine risk. In Japan, economic policy has been struggling with deflation for over a decade now and has recently introduced a number of quantitative and qualitative easing measures. While Hungary is not directly threatened by deflation risks, persistent deflation in the euro area and the associated stagnation would have an adverse effect on this country as well. In this article, we explain that a decrease in price levels does not in itself constitute deflation. By contrast, if the decrease in prices is extensive and sustained and if it is incorporated into expectations, and if a liquidity trap constrains the scope of monetary policy and there is a genuine risk of a debt spiral, then there is a danger of deflation.

Keywords: financial crisis; deflation; monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E43 E58 (search for similar items in EconPapers)
Date: 2014
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