Article thumbnail

"Understanding Deflation: Treating the Disease, Not the Symptoms"

By Dimitri B. Papadimitriou and L. Randall Wray


Deflation can be defined as a falling general price level utilizing one of the common price indices.the consumer price index; the GDP deflator or other, narrower indices as the wholesale price index; or an index of manufactured goods prices. Falling indices of output prices can be the result of several mechanisms: productivity increases, quality increases and hedonic imputations of prices, competition from low-cost producers, government policy influences, or depressed aggregate demand. Falling output prices, in turn, can have strong effects, especially on the ability to service debts fixed in nominal terms; depending on the level of indebtedness of households and firms, they can set off a classic Minsky-Fisher debt deflation spiral. In this paper, we argue that deflation can and usually does generate large economic and social costs, but it is more important to understand that deflation itself is a symptom of severe and chronic economic problems. This distinction becomes important for the design and implementation of economic policy.

OAI identifier:

Suggested articles


  1. (2003). California Bond Prices Reflect State’s Turmoil.”
  2. (1999). Can Goldilocks Survive?” Policy Note 1999/4.
  3. (2002). Claudio dos Santos and Gennaro Zezza.
  4. (2003). Debts Snowball as Rules of Husbandry are Ignored.” Financial Times,
  5. (2002). Deflation: Making Sure ‘It’ Doesn’t Happen Here.” Remarks by Governor Ben
  6. (2002). Dropping the Bonds.”
  7. (2003). ECB Recommends Central Bank Sell U.S. Agency Debt, Person Says.”
  8. (2002). EU Issues Ironic Censure to Once Mighty Powerhouse.” The Guardian,
  9. (2002). Europe Strains to Put Laggards Back in Line.”
  10. (2003). Fannie Mae’s Loss Risk is Larger, Computer Models Show.”
  11. (2003). Fed Chief Gives Bright Outlook; Steady on Rates.”
  12. (2002). Germany Needs Reform, Not Reflation.” Financial Times,
  13. (2003). Greenspan, Broadly Positive, Spells out Deflation Worries.”
  14. (2002). Greenspan’s Speech Focuses on Deflation, Not Inflation.”
  15. (2003). Lunch with the FT: Milton Friedman.” Financial Times,
  16. Manufacturing Rebound?”
  17. (2003). Schroeder Offers Plan for Ending Germany’s Economic Slump.”
  18. (1986). Stabilizing an Unstable Economy.
  19. (2001). The Developing U.S. Recession and Guidelines for Policy.” Strategic Analysis.
  20. (2003). The U.S. Economy: A Changing Strategic Predicament.” Strategic Analysis.

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.