Ugly deflation in the nineteenth century – and now

mysteries of the economic science

Real-World Economics Review Blog

During the 1855-1914 period product price deflation in the UK did not necessarily coincide with low growth or a shrinking economy. However. When product price deflation coincided with lower earnings for labour the result was (almost) invariable sub par growth and often even outright economic decline and rising unemployment.

The Eurozone as a whole ‘is only one shock away’ from serious deflation. In Greece, which has seen its domestic price level decline at a rate of about -3% for quite some time now, serious deflation has already arrived. This means that the discussion about the consequences of inflation is flaring up. Paul Krugman for instance chides Jaime Caruana, head of the Bank of International Settlements, for invoking an a-historical conceptual framework when he compares nineteenth century bouts of inflation with the situation today. The ideas of Caruana are based upon work by Claudio Borio and Andrew Filardo

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