A Study of Deflation

Introduction

Different countries often see the same scenario in their economic forecast but how they handle the situation and the outcome can differ greatly. The economic issue that is going to be discussed in this work is deflation. Two countries that offer an interesting discussion are The United States and Japan. These two countries were experiencing a deflationary period at roughly the same time but had rather different outcomes. Each countries actions and policy implementations resulted each a different conclusion.

Deflation is when the price level of general goods and services start to fall. At this point, the inflation rate at the economy will be a negative amount, as it has fallen below zero. This falling price level may seem like a positive thing as it technically increases the monetary value of the currency, and that means the currency goes further, but the negative effects outweigh this. The effects of deflation can lead to a higher unemployment rate, an increase in the value of debt, lower capital investments and an obscured customer demand. All theses signs lead to contracting and degrading economy. This will eventually lead to a liquidity trap and can cause some serious problems. The liquidity trap leads to a prediction that there very might well be a recession or depression in the near future. The efforts of a central bank are not enough to stimulate the economy and the interest rate will remain at zero or a very low level. With this information in hand, let’s take a look at each country.

Deflation in Japan

The deflation to discuss in Japan first started during and shortly after the great depression, but the focus for this purpose of comparison is aimed on the early 1990’s. Looking at an article from Kaoru Hosono...

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...to revive themselves and steer clear of another Liquidity trap. Using a few tools to help adjust their monetary base and inflation, Japan may just be able to get out of the trap.

Works Cited

Herr, Hansjörg, and Milka Kazandziska. "The Labour Market and Deflation in Japan." International Journal of Labour Research 2.1 (2010): 79-98. ProQuest. Web. 1 Dec. 2013.

Svensson, Lars E. O. "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others." The Journal of Economic Perspectives 17.4 (2003): 145-66. ProQuest. Web. 1 Dec. 2013.

Orphanides, Athanasios. Monetary Policy in Deflation: The Liquidity Trap in History and Practice. Rochester:, 2004. ProQuest. Web. 12 Nov. 2013.

Kazuo Sato, The liquidity trap: Japan, 1996–2001 versus the United States, 1933–1940, Journal of Asian Economics, Volume 19, Issue 2, April 2008, Pages 155-169, Web. 15 Nov. 2013.