Europe Needs a Credible Deflation Strategy
— January 15, 2014
By Tom Cooley and Kim Schoenholtz
Deflation is incredibly costly and dangerous. Ben Bernanke gave a speech in 2002, shortly after he became a central bank governor, called "Deflation: Making Sure 'It' Doesn't Happen Here," in which he expressed confidence that "the Fed would take whatever means necessary to prevent significant deflation." To sustain expectations of rising prices, the ECB needs to do the same.
The best strategy is to prevent deflation from getting started in the first place. But what can a central bank do if deflation has set in and the policy interest rate has sunk to zero? Bernanke cited four approaches: (1) expand the balance sheet through loans or open-market purchases of assets; (2) lower long-term yields by committing to keep short-term interest rates low or by announcing a cap on government bond yields backed by unlimited willingness to purchase securities; (3) pursue monetary expansion in cooperation with fiscal stimulus; and (4) currency devaluation.
Read the full article as published by CNBC
Tom Cooley is the Paganelli-Bull Professor of Business and International Trade and Kim Schoenholtz is a Professor of Management Practice and Director of the Center for Global Economy and Business.