{ "title": "Transcript of an IMF Economic Forum: Should We Be Worried About 'Deflation'?", "publication": "IMF News, May 29, 2003", "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/54/tr030529", "canonical": "https://www.imf.org/en/news/articles/2015/09/28/04/54/tr030529", "overlayPath": "/en/news/articles/2015/09/28/04/54/tr030529/index.md", "summary": "Event date and location: May 29, 2003; Washington DC.", "publishDate": "2003-05-29", "sections": [ { "heading": "Overview and context", "content": "- Event date and location: May 29, 2003; Washington DC.\n- Panel participants: Kenneth Rogoff (Moderator), Manmohan S. Kumar, Laurence Ball, Vincent Reinhart, Kim Schoenholtz.\n- Motivation: Rising concerns about deflation amid falling inflation rates, massive declines in global equity markets, widening output gaps, and geopolitical uncertainties.\n- IMF staff study referenced: \"Deflation: Determinants, Risks and Policy Options\" (interdepartmental task force; lead author Manmohan S. Kumar)." }, { "heading": "Key findings on incidence and measurement", "content": "- Share of industrial and large emerging market economies experiencing episodes of declining prices (country months relative to total) increased:\n - from around 1 to 3 percent in the first half of the 1990s\n - to 8 to 15 percent in the past 5 years.\n- Measured inflation of less than 1 percent may already be close to price stability or reflect declining prices (given upward bias in measured inflation).\n- Conclusion: Mild deflation may be affecting an even higher proportion of countries than direct deflation counts imply." }, { "heading": "Causes, channels, and costs of deflation", "content": "- Causes:\n - Demand shocks: severe cyclical downturns, bursting asset-price bubbles, excessively tight policies.\n - Supply shocks: large positive supply shifts from technological innovation or productivity growth that raise output while prices decline.\n- Expectations: Once prices decline, expectations can reinforce downward pressures, potentially creating a self-enforcing deflationary spiral.\n- Costs of sustained deflation:\n - Redistribution from debtors to creditors, depressing demand.\n - Real wage increases if nominal wages are inflexible, reducing profits and employment.\n - Nominal interest rate floor (zero) curtails conventional monetary policy effectiveness.\n - Distortions to credit intermediation as collateral values fall." }, { "heading": "Historical evidence", "content": "- Most extreme case: worldwide deflation and catastrophic collapse in activity in the late 1920s and early 1930s.\n- 19th-century deflation episodes: associated with rising debt burdens, bankruptcies, social and political unrest, financial crises, significant output volatility.\n- Japan: recent deflation associated with subpar performance over several years; forecasts systematically overestimated inflation during onset of deflation." }, { "heading": "Indicators, vulnerability assessment, and model results", "content": "- Framework: indicators include price variables, output gap / excess capacity, credit and monetary indicators, asset market conditions, structural factors, and policy flexibility.\n- Aggregation: estimated contributions from prices, output gap, asset markets, credit and monetary factors combined into an overall index of deflation vulnerability (early 1990s to present); a financial/credit-weighted index computed as well.\n- Results and country rankings:\n - Increased vulnerability to deflation in a number of industrial and emerging market economies.\n - Highest vulnerabilities: Japan (already in deflation), followed by Hong Kong SAR and Taiwan Province of China (all three have deflation).\n - United States: score indicates a low risk.\n - Europe: risks of mild deflation low in major countries except Germany (higher vulnerabilities reflect weak demand and credit growth and financial sector strains within limited policy room).\n- Phillips Curve / gap estimates for G-7 (supplementary analysis):\n - United States: unemployment gap would have to increase by 2 percentage points or more for onset of mild deflation.\n - Germany: unemployment gap increase of 1 to 1.5 percentage points would be required.\n - Japan: already has deflation; unemployment gap would have to increase by 1 percentage point for deflation to get worse (defined as an increase in deflation of 2 percentage points)." }, { "heading": "Country-specific assessments and notable statistics", "content": "- Japan:\n - Already in deflation; risks of intensification emphasized.\n - Historical policy mix and weak financial intermediation contributed to persistence.\n - Observed policy actions (e.g., monetary base expansion) have not yet restored robust recovery: example cited monetary base growth of 30 or 40 percent a year in Japan without full success.\n - Surveys: households typically anticipate prices to fall for two or more years ahead.\n- Germany:\n - Elevated vulnerability driven by weak demand, constrained fiscal room (Stability and Growth Pact), limited monetary maneuver (monetary policy set for the euro area).\n - Germany reported into its third year of growth well below 1 percent.\n - Nominal domestic demand shrank last year, the first drop in over 3 decades.\n - Potential adjustment dynamics: low German inflation or deflation could restore competitiveness but at the cost of potential damage to growth and the financial system.\n- United States:\n - Viewed as low risk for sustained deflation.\n - Federal funds rate cited at 1.25 percent (concern about limited room for conventional policy).\n - Risks mitigated by aggressive fiscal and monetary stimulus already in place (panelists noted large policy stimulus and actions to shape expectations).\n - Market moves cited: broad equity market jumped by more than 20 percent; trade-weighted dollar dropped more than 10 percent versus major currencies; surveys of long-term inflation expectations show annual increases of 2.5 percent or more.\n- China:\n - Deflationary pressures linked mostly to transitory and longer-term supply-related factors.\n - GDP growth averaged about 7 percent for several years.\n - Transitory effects expected to ease; longer-term capacity expansion and excess labor could continue to weigh on prices.\n- Transmission and international considerations:\n - No compelling evidence of international transmission of deflation in normal floating-exchange-rate regimes; each central bank retains primary influence over its domestic price level over time.\n - However, a deflationary spiral in a major economy could trigger shocks elsewhere via trade or financial channels (e.g., capital repatriation), and correlated business cycles raise the risk that localized deflation signals broader weakness." }, { "heading": "Policy recommendations: prevention and response", "content": "- Prevention (preemptive action in low-inflation environment):\n - Adopt a clear communication strategy highlighting policymakers' ability and commitment to contain deflation.\n - Monetary policy regime design:\n - Inflation-targeting regimes should aim for an adequate buffer zone above zero; avoid targeting inflation \"too low\" (examples and views cited: ECB target perceived near 1 percent criticized as too low; Bank of England targeting 2.5 percent viewed as more appropriate; suggestions that higher targets, e.g., 3–4 percent, would reduce zero-bound risk).\n - Fiscal policy: tailor fiscal measures credibly to boost aggregate demand when needed.\n - Exchange-rate regime: flexible rates afford greater protection from imported deflation than fixed regimes.\n - Structural reforms: credible, well-articulated package of reforms can raise growth potential and support demand expectations.\n- Dealing with deflation once set in:\n - Credible commitment to end deflation is essential.\n - Monetary measures:\n - Conventional: lower short-term rates (constrained by zero lower bound).\n - Unconventional / balance-sheet tools: purchase long-term bonds, widen asset purchases (equities, foreign-currency assets), alter composition and size of central bank balance sheet, shape expectations via conditional/unconditional commitments to future policy paths.\n - \"Shaping expectations\": conditional commitments (e.g., hold rates low until \"Y\" happens) and unconditional time-bound pledges can influence longer-term rates and asset prices.\n - Risks and caveats: operational challenges, uncertain impacts, potential need for very large scale operations, possible market distortions, credibility concerns if words do not match deeds.\n - Fiscal measures: when monetary policy constrained, fiscal expansion is the textbook cure; sequencing and credibility matter (Japan and Germany face constraints that limit fiscal options).\n - Communication and credibility: central bank rhetoric and demonstrated willingness to act are central to influencing expectations and preventing entrenchment.\n- Policy priorities:\n - More symmetric attention to risks of falling as well as rising prices.\n - Preventing deflation is preferable to fighting entrenched deflation; if deflation takes hold, aggressive policies to eradicate deflationary expectations are essential." }, { "heading": "Panel debate — contrasting perspectives", "content": "- Laurence Ball:\n - Emphasizes liquidity trap (large output gap + zero nominal rate) as the main hazard rather than modest falling prices per se.\n - Advocates higher inflation targets (e.g., above 2 percent) to create policy room and favors fiscal policy as the decisive tool in a liquidity trap.\n- Vincent Reinhart:\n - Argues central banks can still influence economic conditions at low nominal rates by shaping expectations and using balance-sheet tools; stresses communication credibility and the Federal Reserve's toolkit.\n - Notes costs of very low rates (market segmentation, mistaken perception of policy impotence).\n- Kim Schoenholtz:\n - Stresses that risk of sustained deflation rises where credible commitment to price stability is lacking (examples: Japan constrained by perceived asymmetry and weak intermediation; Germany constrained politically and institutionally).\n - Emphasizes that aggressive policy to influence expectations can halt deflation; central banks ultimately have the unlimited ability to create money, but willingness to act matters.\n- Consensus points:\n - Japan is of greatest concern; Germany presents notable risks; United States is at lower risk though limited policy space is a concern.\n - Communication, credibility, and timely preemptive policy are critical to preventing and combating deflation." }, { "heading": "Illustrative numerical and factual items (preserved exactly as stated)", "content": "- Dates: May 29, 2003.\n- Incidence increases: \"from around 1 to 3 percent in the first half of the 1990s to 8 to 15 percent in the past 5 years.\"\n- Measured inflation threshold: \"less than 1 percent may already be close to price stability or even reflect declining prices.\"\n- Unemployment gap estimates to induce mild deflation:\n - United States: \"would have to increase by 2 percentage points or more.\"\n - Germany: \"1 to 1.5 percentage points.\"\n - Japan: \"unemployment gap would have to increase by 1 percentage point for deflation to get worse, as defined as an increase in deflation of 2 percentage points.\"\n- U.S. federal funds rate referenced: \"1.25 percent.\"\n- Example of monetary base growth in Japan cited: \"30 or 40 percent a year.\"\n- Equity market movement cited: \"broad equity market has jumped by more than 20 percent.\"\n- Trade-weighted dollar movement cited: \"the trade-weighted dollar has dropped more than 10 percent versus major currencies.\"\n- Long-term inflation expectations cited: \"surveys of long-term inflation expectations continue to show annual increases of 2.5 percent or more.\"\n- China: \"GDP growth has averaged about 7 percent for several years.\"\n- Germany: \"currently into its third year of growth well below 1 percent.\" and \"Nominal domestic demand shrank last year, the first drop in over 3 decades.\"\n\nTranscript of an IMF Economic Forum: Should We Be Worried About 'Deflation'? (May 29, 2003).\n\n---\n\n Content in this bundle\n\n- Tr030529pdf (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\n References\n\n- Germany and the IMF\n- Japan and the IMF\n- United States and the IMF\n- Transcripts\n- Deflation: Determinants, Risks, and Policy Options—Findings of an Interdepartmental Task Force\n- PRESS CENTER\n- View\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/54/tr030529" } ], "bullets": [ "[Markdown version](/en/news/articles/2015/09/28/04/54/tr030529/index.md)", "[Structured JSON version](/en/news/articles/2015/09/28/04/54/tr030529/index.json)", "[Bundle manifest](/en/news/articles/2015/09/28/04/54/tr030529/bundle-manifest.json)", "Published: May 29, 2003", "Event date and location: May 29, 2003; Washington DC.", "Panel participants: Kenneth Rogoff (Moderator), Manmohan S. Kumar, Laurence Ball, Vincent Reinhart, Kim Schoenholtz.", "Motivation: Rising concerns about deflation amid falling inflation rates, massive declines in global equity markets, widening output gaps, and geopolitical uncertainties.", "IMF staff study referenced: \"Deflation: Determinants, Risks and Policy Options\" (interdepartmental task force; lead author Manmohan S. Kumar).", "Share of industrial and large emerging market economies experiencing episodes of declining prices (country months relative to total) increased:", "Measured inflation of less than 1 percent may already be close to price stability or reflect declining prices (given upward bias in measured inflation).", "Conclusion: Mild deflation may be affecting an even higher proportion of countries than direct deflation counts imply.", "Causes:", "Expectations: Once prices decline, expectations can reinforce downward pressures, potentially creating a self-enforcing deflationary spiral.", "Costs of sustained deflation:", "Most extreme case: worldwide deflation and catastrophic collapse in activity in the late 1920s and early 1930s.", "19th-century deflation episodes: associated with rising debt burdens, bankruptcies, social and political unrest, financial crises, significant output volatility.", "Japan: recent deflation associated with subpar performance over several years; forecasts systematically overestimated inflation during onset of deflation.", "Framework: indicators include price variables, output gap / excess capacity, credit and monetary indicators, asset market conditions, structural factors, and policy flexibility.", "Aggregation: estimated contributions from prices, output gap, asset markets, credit and monetary factors combined into an overall index of deflation vulnerability (early 1990s to present); a financial/credit-weighted index computed as well.", "Results and country rankings:", "Phillips Curve / gap estimates for G-7 (supplementary analysis):", "Japan:", "Germany:", "United States:", "China:", "Transmission and international considerations:", "Prevention (preemptive action in low-inflation environment):", "Dealing with deflation once set in:", "Policy priorities:", "Laurence Ball:", "Vincent Reinhart:", "Kim Schoenholtz:", "Consensus points:", "Dates: May 29, 2003.", "Incidence increases: \"from around 1 to 3 percent in the first half of the 1990s to 8 to 15 percent in the past 5 years.\"", "Measured inflation threshold: \"less than 1 percent may already be close to price stability or even reflect declining prices.\"", "Unemployment gap estimates to induce mild deflation:", "U.S. federal funds rate referenced: \"1.25 percent.\"", "Example of monetary base growth in Japan cited: \"30 or 40 percent a year.\"", "Equity market movement cited: \"broad equity market has jumped by more than 20 percent.\"", "Trade-weighted dollar movement cited: \"the trade-weighted dollar has dropped more than 10 percent versus major currencies.\"", "Long-term inflation expectations cited: \"surveys of long-term inflation expectations continue to show annual increases of 2.5 percent or more.\"", "China: \"GDP growth has averaged about 7 percent for several years.\"", "Germany: \"currently into its third year of growth well below 1 percent.\" and \"Nominal domestic demand shrank last year, the first drop in over 3 decades.\"", "[Tr030529pdf (PDF)](/-/media/websites/imf/imported/external/np/tr/2003/pdf/_tr030529pdf.pdf){rel=\"external\" type=\"application/pdf\"}", "[Germany and the IMF](http://www.imf.org/external/country/DEU/index.htm)", "[Japan and the IMF](http://www.imf.org/external/country/JPN/index.htm)", "[United States and the IMF](http://www.imf.org/external/country/USA/index.htm)", "[Transcripts](https://www.imf.org/en/news/searchnews)", "[Deflation: Determinants, Risks, and Policy Options—Findings of an Interdepartmental Task Force](https://www.imf.org/external/pubs/ft/def/2003/eng/043003.htm)", "[PRESS CENTER](http://presscenter.imf.org/)", "[View](https://www.imf.org/external/mmedia/view.asp?eventID=177)", "[https://www.imf.org/en/home](https://www.imf.org/en/home)" ], "related": [ { "title": "Tr030529pdf", "role": "document", "sourceUrl": "https://www.imf.org/-/media/websites/imf/imported/external/np/tr/2003/pdf/_tr030529pdf.pdf", "binary": { "path": "/-/media/websites/imf/imported/external/np/tr/2003/pdf/_tr030529pdf.pdf", "mime": "application/pdf" } } ], "alternates": { "markdown": "/en/news/articles/2015/09/28/04/54/tr030529/index.md", "json": "/en/news/articles/2015/09/28/04/54/tr030529/index.json", "bundleManifest": "/en/news/articles/2015/09/28/04/54/tr030529/bundle-manifest.json" }, "generatedAtUtc": "2026-09-27T11:43:37.884Z" }