Tag: deflation

While deflation was quite common right up to World War II, it has not been seen in the UK since 1947. The podcast considers whether it might return and looks at the impact of deflation on economic activity. There is a short case study on the deflationary years suffered by Japan between 1997 and 2006 and a consideration of policies that might be appropriate to overcome defaltionary pressures.

Economists never like to use simple words when there are more complex ones available! So, the new term for printing money is ‘quantitative easing’. This refers to deliberate increases in the money supply aimed at preventing deflation. The real concern is whether quantitative easing will stoke up inflationary pressures for the future – the balance between inflation and deflation is a fine line to tread. Quantitative easing becomes necessary when there is danger of deflation and interest rates have already been cut as far as is possible.

Another problem, in the short term, is that an increase in the monetary base may have little effect on broader money (M4 in the UK) if people do not want to borrow and thus credit creation is limited.

The articles below all look at various different aspects of quantitative easing.

Europeans Disagree Drastically On Fed Rate Cut Deutsche Welle (17/12/08)
Financial crisis: Free money coming your way! Telegraph (17/12/08)
Wondering what on earth Nils was on about? He’s written this for you BBC News Online (PM programme) (18/12/08)
Japan forecasts no growth in 2009 BBC News Online (19/12/08)
New economic policy: If you haven’t got enough of this stuff, just print some more Scotsman (18/12/08)
Ground Zero The Economist (18/12/08)
Fed throws out the rulebook Times Online (18/12/08)
Quantitative easing: the modern way to print money or a therapy of last resort? Telegraph (8/1/09)
Forget hard choices. We need pampering Times Online (18/12/08)
Jeremy Warner: Darling wants say on ‘quantitative easing’ Independent (8/1/09)

Questions

  1. Define the term ‘quantitative easing’.
  2. Explain the mechanism by which the monetary authorities can implement a policy of quantitative easing.
  3. Discuss the relative effectiveness of cuts in interest rates and quantitative easing to boost aggregate demand in a recession.
  4. Analyse the impact on an economy of a prolonged period of deflation.

Some economists believe that deflation is now a more serious threat than inflation. If this is the case then conventional monetary policy may not be enough to prevent deflation. In the article below, Gavyn Davies argues that the solution is to start thinking like South American dictators and print more money!

We must start thinking like South American dictators Guardian (13/11/08)

Questions

  1. Explain what is meant by “deflation”.
  2. Examine the link between deflation and depression.
  3. Explain why deflation requires a different policy response from inflation.
  4. Discuss the likely success of a policy of “printing money” in preventing deflation.
  5. Assess the impact of financing tax cuts through the sale of government bonds in a deflationary situation.