Tuesday, September 14, 2010

Why Deflation Could Be Good

I have in the past covered the subject of why deflation is not necessarily bad for economic growth before, but David Beckworth also provides a good post on the subject, and he also points to how the failure to distinguish between different causes of price deflation was to blame for the Fed's ominous decision to hold down interest rates in the 2001-05 period, a decision that caused the housing bubble.

However, I would prefer to phrase the cases where deflation is bad for [short-term] economic growth as being caused by increases in money demand or reductions in money supply, rather than being caused by reductions in "aggregate demand".