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Deï¬ation and Depression: Is There an Empirical Link? By ANDREW ATKESON According to standard economic theory, deï¬ation is the necessary consequence of optimal monetary policy. In 1969, Milton Friedman argued that, under the optimal policy, the nominal interest rate should be zero, and the price level should fall steadily at the real rate of interest. Since then, Friedmanâs argument has been conï¬rmed in a formal setting (see e.g., V. V. Chari et al., 1996; Harold Cole and Narayana Kocherlakota, 1998). Most policymakers, however, are extremely reluctant to implement any policy that would lead to deï¬ation. This reluctance seems to stem from the experience of the Great Depression, in which deï¬ation and depression appear to have been tightly linked (see e.g., Ben Bernanke and Kevin Carey, 1996). That experience has led to theories in which deï¬ation leads to depression. The quantitative ability of those theories to account for the Great Depression is now being debated (see e.g., Cole and Lee Ohanian, 2001). Here we examine the empirical relationship between deï¬ation and depression in a broad historical context, including but not limited to the Great Depression. We use a panel data set on inï¬ation and real output growth for 17
American Economic Review – American Economic Association
Published: May 1, 2004
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