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I recently attended an economic conference with mostly conservative-leaning economists. Someone had a paper that mentioned how certain types of deflation can actually be good, as when rapid productivity growth helped reduce prices in the late 1800s.

I agree with this, and mentioned that I rarely hear conservatives talk about “good inflation.” Well I might as well have thrown a skunk into the middle of the room. Let’s just say that the idea of “good inflation” didn’t go over too well.

And isn’t that the problem? Isn’t that why we are where we are? We have all sorts of models that are basically symmetrical. You might argue that a stable price level is ideal, and that any inflation or deflation is bad. But if you argue that some deflation is bad and some is good, then you implicitly have a model that distinguishes between demand and supply shocks. So supply or productivity-driven deflation is good. Of course those models imply that inflation caused by a fall in aggregate supply is also good. The models are completely symmetrical. This shouldn’t even be controversial.

So why don’t conservatives look at things that way? And why do you rarely hear liberals talk about “good deflation.” Maybe it’s just mood affiliation. Or maybe people just don’t have the right model in their heads. (I.e. the model I have in my head.) Some people do understand that the argument is symmetrical. (I seem to recall both David Beckworth and George Selgin making similar observations.) But it seems to me that they (and a few others) are the exception. And maybe that’s why the Fed is having so much trouble creating “good inflation.”

PS. Notice that NGDP targeting automatically creates deflation when deflation is appropriate and inflation when inflation is appropriate.

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Tags: Deflation

This entry was posted on December 14th, 2011 and is filed under Inflation, Monetary Theory, NGDP targeting. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



