Is Deflation Necessarily a Bad Thing?
Is Deflation Necessarily a Bad Thing? Monday December 3, 2007#spacer{clear:left}#abc #sidebar{margin-top:1.5em}zSB(3,3)Perhaps not. Gabriel Mihalache points me towards the article Deflation Isn’t Always Dangerous. Some key hilights: Deflation — an actual decline in prices — can cause economic harm through several channels. First, given relatively rigid input prices, such as wages, an unexpected deflation will lower firms’ profit margins, reducing production and employment. Second, unexpected deflation means debt becomes more onerous, leading to an increase in delinquencies and defaults, followed by weakening balance sheets of financial institutions and reduced lending. Third, since actual interest rates reflect a real-interest-rate component and an expected-inflation component, deflation c
