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Transcript of an IMF Economic Forum Should We Be Worried About 'Deflation'?
May 29, 2003



Deflation: Determinants, Risks, and Policy Options—Findings of an Interdepartmental Task Force


April 30, 2003

This study presents the IMF staff's analysis of the causes, consequences and risks of deflation. It develops a novel methodology for assessing and quantifying deflation risk, and applies it to a wide range of industrial and emerging market economies. It concludes that there is only a relatively small risk of global deflation. But that there are increasing risks of falling prices in some major economies, and in many smaller ones. It puts forward a range of policies for proactively averting deflation in countries where the risk is high. It also discusses policies for dealing with deflation once it has become entrenched.

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Also see June 2003 Occasional Paper version.

Contents


Summary
 

I.

Introduction and Summary

 

II.

Measurement, Determinants and Costs

A. Definition and Recent Experience
B. Determinants
C. Costs of Deflation
 

III.

Historical Experiences of Deflation and Policy Lessons

 

IV.

Risks of Deflation

  A.
Global Deflationary Pressures
B. Overall Assessment
C. Deflationary Pressures in Major Economies
D. China
 

V.

Policy Response

A. Policy Before the Onset of Deflation
B. Policy Once Deflation Has Set In
 
Text Tables
1a. Incidence of Deflation and Low Inflation: Consumer Prices
1b. Incidence of Deflation and Low Inflation: Producer Prices
2a. Index of Deflation Risk, with Latest Data (Weighted)
2b. Index of Deflation Risk, with Latest Data (Equal Weight)
3a. Index of Deflation Risks (1995) (Weighted)
3b. Index of Deflation Risks (1995) (Equal Weight)
4. Deflation Risk: Incremental Changes in Output and Unemployment Gaps
 
Figures
1. Aggregate Demand and Supply Shocks
2. Monetary Policy in a Liquidity Trap
3. Inflation Target and Zero Bound
 
Boxes
4.1 United States—Economic Outlook and Deflation Risks
4.2 Deflationary Pressures in Germany
4.3 Deflation in Japan
4.4 China—Recent Deflation Episodes
5.1 Inflation Targeting and Deflation Risks
 

Appendix I

   
Charts
1a. CPI and GDP Deflator in G-7
1b. CPI and GDP Deflator in Other Advanced Economies
1c. CPI and GDP Deflator in Asian Economies
1d. CPI and GDP Deflator in Other Emerging Market Economies

2a.

Goods Prices

2b. Producer Prices
3. Average Inflation Rates (CPI)
4. Consumer Prices and Inflation
5. Yield Differential Between Nominal and Index-Linked Government Bonds
6. Commodity Prices
7a. GDP Growth and Output Gap in G-7
7b. GDP Growth and Output Gap in Asian Emerging Market Economies
7c. GDP Growth and Output Gap in other Emerging Market Economies
8a. Equity Prices in Industrial Countries
8b. Equity Prices in Emerging Markets
9. Price Earning Ratios in Advanced Economies
10. Real Effective Exchange Rates
11. Private Sector Credit
12a. Stock Markets (Comparison of Japan, U.S. and Germany- Monthly Data)
12b. Real Residential Price Indices
13a. China's Trade Shares
13b. China—Regional and Global Trade
14. China—Transmission of Deflation
 
References
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