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Deflation and Depression: Is There an Empirical Link?

Deflation and Depression: Is There an Empirical Link? Deflation and Depression: Is There an Empirical Link? By ANDREW ATKESON According to standard economic theory, deflation 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, Friedman’s argument has been confirmed 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 deflation. This reluctance seems to stem from the experience of the Great Depression, in which deflation 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 deflation 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 deflation and depression in a broad historical context, including but not limited to the Great Depression. We use a panel data set on inflation and real output growth for 17 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Review American Economic Association

Deflation and Depression: Is There an Empirical Link?

American Economic Review , Volume 94 (2) – May 1, 2004

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References (15)

Publisher
American Economic Association
Copyright
Copyright © 2004 by the American Economic Association
Subject
Papers
ISSN
0002-8282
DOI
10.1257/0002828041301588
Publisher site
See Article on Publisher Site

Abstract

Deflation and Depression: Is There an Empirical Link? By ANDREW ATKESON According to standard economic theory, deflation 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, Friedman’s argument has been confirmed 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 deflation. This reluctance seems to stem from the experience of the Great Depression, in which deflation 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 deflation 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 deflation and depression in a broad historical context, including but not limited to the Great Depression. We use a panel data set on inflation and real output growth for 17

Journal

American Economic ReviewAmerican Economic Association

Published: May 1, 2004

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