Sunday, September 30, 2007

William White on Benign Deflation

I have discussed in this blog the difference between malign and benign deflation and why it matters to macroeconomic stability. I have also posted some of Andy Xie's (formerly of Morgan Stanley) work who makes this same argument. Here is an excerpt from another voice making this same point:

Is Price Stability Enough?
William White , Bank for International Settlements

"One implication of positive supply side shocks is that they call into question whether monetary policy should continue to pursue the near-term [monetary policy] target of a low positive inflation rate... Failure to adjust the [monetary policy] target downward (whether explicitly or implicitly) in the face of positive supply shocks would result in lower policy rates than would otherwise be the case... Paradoxically, taking out insurance against a benign deflation might over an extended period increase the probability of the process eventually culminating in a “bad” or even “ugly” one. "

Yes, I have provided a link to this article before, but I after looking at it again today I thought it was worth another plug on my blog. Read the entire article.

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