Aggregate Supply-Driven Deflation and Its Implications for Macroeconomic Stability

Abstract

Deflation is generally considered to be inconsistent with macro-economic stability. Any sustained decline in the price level is widely believed to be associated with weak to negative economic growth, a lower bound of zero on the policy interest rate, and an increase in financial disintermediation. However, a number of recent studies examining both historical, cross-country experience with deflation and more recent developments find that these concerns are not nec-essarily associated with deflation (Selgin 1997, 1999; Cleveland