POTENTIAL FOR DEFLATION IN THE ECONOMY

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 eliminati

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tant to purchase in an economy characterized by price deflation because they know that if they wait, prices will fall. The situation is exacerbated in relation to time-payment purchasing (especially so on bit-ticket items such as houses) because asset values will not appreciate over time to compensate for (a) normal interest payments that apply in either inflationary or deflationary scenarios or (b) the difference between the value of an asset on the date of purchase and the value at some future date in an economy characterized by deflation. The result, if deflation persists, is not simply a standstill in the economy but, rather, a retrenchment of economic output (Ahearne, Gagnon, Haltmaier, and Kamin 25). Unorthodox Policy Prescriptions for Dealing with Deflation in the United States Economy Policy prescriptions to deal with the presence of deflation in the United States economy may be considered to be unorthodox because they would represent a departure from the policies implemented by the Federal Reserve over the past several decades that focused on the control of inflation. The implementation of policies to counter deflation in the economy would first require a change of policy focus at the Federal Reserve. Second, a necess
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Approximate Word count = 1351
Approximate Pages = 5 (250 words per page)

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