RESPONDING TO THE POTENTIAL FOR DEFLATION IN THE ECONOMY: UNORTHODOX POLICY CONSIDERATIONS
When the powerful Japanese economy began to experience serious problems about a decade ago, many explanations were offered; however, little serious consideration was given to deflation in the economy (Shiratsuka 59). In 2003, however, deflation is recognized as a serious impediment to any degree of substantial recovery in the Japanese economy (Hess 178). When the United States economy entered a downward spiral in 2001, many explanations were offered, but few analysts mentioned deflation as a cause (Board of Governors, Federal Reserve System 1). Over the past two years, however, influential economists have begun musing about the potential of deflation as a causal factor in the sluggish United States economy (Miller 94). This research examines some of the implications of the presence of deflation in an economy, as well as some of the unorthodox policy prescriptions suggested for dealing with the presence of deflation in the economy.
Implications of Deflation for an Economy
For almost the entire period since the end of the Second World War, the primary focus of central bankers in the developed Western economies has been on what they refer to a the control of inflation. Most people understand the term ôcontrol of inflationö to mean the elimination of inflation. For central bankers, however, the term ôcontrol of inflationö means to manage inflation, as opposed to eliminating inflation (Rosenblum 12). In managing inflation, central bankers attempt to maintain a regime of relatively steady price increases in the general economy in order to encourage consumers and businesses to continue to spend money for goods and services. The rationale at a general level is that products bought today will be more expensive in nominal terms one year from today than they are today. The rationale for time-payment purchases is that a purchaser will r...