Sense and nonsense about deflation

Understanding Deflation The study of the economics of deflation, and worries over its consequences, is primarily preoccupied with the phenomenon wherein there is a generalized and persistent decline in the The Centre for International Governance Innovation 3 general level of prices. [...] Owing to various disagreements and technical issues surrounding the incorporation of asset price movements into a generalized measure of inflation, we continue to rely on indexes that are based on the evolution of prices of goods and services to evaluate the stance of monetary policy. [...] In Japan, one of the post-World War II economic miracles, where relatively low inflation was a fact of life for decades, except briefly when the first oil price shock of the 1970s led to a brief spike in inflation, the economy began to turn for the worse. [...] Indeed, policy makers at the time claimed that productivity improvements, the result of the spread of computing technology, heralded the coming of age of a “new” economy. [...] Yet, while there is little debate at least in the industrial world concerning the flexibility in most prices for goods and services prior to the 1940s, the post-World War II world is often said to be characterized by downward wage rigidity either due to contractual reasons or because the labour force is in the grips of some form of wage illusion prompted by the belief that lower wages automaticall