Disinflation, low inflation, and deflation prevention

Lecturer: Kenneth Kuttner (bio)

Summary

Just a few years ago, the primary concern of most monetary policymakers was reducing inflation, and maintaining a low rate of inflation going forward. While this remains a significant concern for many central banks, the success of disinflationary policies in the past decade has brought to light a new set of issues pertaining to the economy’s adaptation to low inflation, the conduct of policy in such an environment, and the prevention of outright deflation.

This year’s discussion topic focuses on the issues faced by monetary policymakers in three distinct sets of circumstances: moderate inflation, low inflation, and deflation. While each of these environments presents its own unique challenges, several broader issues are common to all three. These include: the costs of inflation or deflation, the choice of a monetary policy framework and nominal anchor, the evolution of the structure of the economy in response to the inflationary environment, the functioning of the monetary transmission mechanism, and the role of expectations in successfully implementing monetary policy.

Participants should prepare by reading all four of the papers under the "general reading" heading, below. In addition, each participant should come prepared to discuss at least one case study, such as those listed below. Participants are, of course, also welcome to use their own countries’ experiences as case studies. Those who wish to do so are nonetheless encouraged to read at least one of the published case studies as a guide to the sorts of issues to be covered in the discussion groups.

General Reading

Why Are Central Banks Pursuing Long-Run Price Stability?
By Stanley Fischer, Federal Reserve Bank of Kansas City symposium on monetary policy, 1996, 28 pages / 239 kb

How Should Central Banks Reduce Inflation? Conceptual Issues
By Mervyn King, Federal Reserve Bank of Kansas City symposium on monetary policy, 1996, 39 pages / 212 kb

Adjusting to Low Inflation — Issues for Policy
By Kate Barker, Speech before the Manchester Statistical Society Meeting, February 18, 2003, 23 pages / 196 kb

Making Sure ‘It’ Doesn’t Happen Here
By Ben Bernanke, Speech before the National Economists Club, November 21, 2002

Suggested Case Studies

Monetary Policy, Deflation, and Economic History: Lessons for the Bank of Japan
By Thomas Cargill, Bank of Japan Monetary and Economic Studies (Special Edition), February 2001, 30 pages / 130 kb

Some Thoughts on Monetary Policy in Japan
By Ben Bernanke, Speech before the Japan Society of Monetary Economics, May 31 2003

Israel’s Experience with Inflation
By Jacob Frenkel, Federal Reserve Bank of Kansas City symposium on monetary policy, 1996, 8 pages / 29 kb

Reducing Inflation in New Zealand: Some Practical Issues
By Don Brash, Federal Reserve Bank of Kansas City symposium on monetary policy, 1996, 16 pages / 54 kb

Disinflation in the Czech Republic: Looking Both Backward and Forward
By Josef Tosovsky, Federal Reserve Bank of Kansas City symposium on monetary policy, 1996, 13 pages / 45 kb

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