The Costs of Deflations: A Historical Perspective

24 Pages Posted: 1 Apr 2015

See all articles by Claudio E. V. Borio

Claudio E. V. Borio

Bank for International Settlements (BIS) - Research and Policy Analysis

Magdalena Erdem

Bank for International Settlements (BIS)

Andrew J. Filardo

Bank for International Settlements (BIS) - Monetary and Economic Department

Boris Hofmann

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: March 2015

Abstract

Concerns about deflation - falling prices of goods and services - are rooted in the view that it is very costly. We test the historical link between output growth and deflation in a sample covering 140 years for up to 38 economies. The evidence suggests that this link is weak and derives largely from the Great Depression. But we find a stronger link between output growth and asset price deflations, particularly during postwar property price deflations. We fail to uncover evidence that high debt has so far raised the cost of goods and services price deflations, in so-called debt deflations. The most damaging interaction appears to be between property price deflations and private debt.

JEL Classification: E31, E32, N10

Suggested Citation

Borio, Claudio E.V. and Erdem, Magdalena and Filardo, Andrew J. and Hofmann, Boris, The Costs of Deflations: A Historical Perspective (March 2015). BIS Quarterly Review March 2015. Available at SSRN: https://ssrn.com/abstract=2580289

Claudio E.V. Borio (Contact Author)

Bank for International Settlements (BIS) - Research and Policy Analysis ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

Magdalena Erdem

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Andrew J. Filardo

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Boris Hofmann

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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