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Descripción de editorial

Central bankers, economists, and policy makers are increasingly concerned about the threat of deflation in many world economies. This unique ebook provides a comprehensive guide to the problem of deflation, with authoritative information, research, and opinions from the U.S. Federal Reserve System. It begins with the famous speech on deflation by former Federal Reserve Chairman Ben Bernanke (Deflation: Making Sure "It" Doesn't Happen Here) and includes recent remarks about the issue by current chair Janet Yellen and other Fed officials.

Contents: Deflation: Making Sure "It" Doesn't Happen Here * Speeches on Deflation, Inflation, and Related Issues (including Chair Janet Yellen 2014) * Deflation: Economic Significance, Current Risk, and Policy Responses * Monetary Policy in Deflation: The Liquidity Trap in History and Practice * Preventing Deflation: Lessons from Japan's Experience in the 1990s * Implications of Low Inflation Rates for Monetary Policy * U.S. Historical Experience with Deflation * Assessing Inflation Expectations and the Risk of Deflation * Overview of Japan's Monetary Policy Responses to Deflation

Despite the severity of the recent financial crisis and recession, the U.S. economy has so far avoided falling into a deflationary spiral. Since mid-2009, the economy has been on a path of economic recovery. However, the pace of economic growth during the recovery has been relatively slow, and major economic weaknesses persist. In this economic environment, the risk of deflation remains significant and could delay sustained economic recovery.

Deflation is a persistent decline in the overall level of prices. It is not unusual for prices to fall in a particular sector because of rising productivity, falling costs, or weak demand relative to the wider economy. In contrast, deflation occurs when price declines are so widespread and sustained that they cause a broad-based price index, such as the Consumer Price Index (CPI), to decline for several quarters. Such a continuous decline in the price level is more troublesome, because in a weak or contracting economy it can lead to a damaging self-reinforcing downward spiral of prices and economic activity.

However, there are also examples of relatively benign deflations when economic activity expanded despite a falling price level. For instance, from 1880 through 1896, the U.S. price level fell about 30%, but this coincided with a period of strong economic growth. Whether a deflation is on balance malign or benign most often will hinge on whether the force generating the falling price level is collapsing aggregate demand or accelerating aggregate supply. Both forces exert downward pressure on the price level but have opposite effects on the level of economic activity.

Deflation can dampen economic activity through several channels. First, a falling price level will increase the real (inflation adjusted) cost of inputs, raising the unit cost of production. Second, when nominal interest rates are low, as they are now, deflation could increase real interest rates, dampening credit-supported economic activity. Third, deflation will increase the real debt burden of businesses and households that already hold debt because they will be repaying the loan principal with dollars of rising purchasing power.

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