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Deflationary Lessons:
What Japanese deflation did and did not do.
http://www.international-economy.com/TIE_W06_Posen.pdf
In other words, those that know how the system works will continue to appropriate and embezzle the productivity of the wealth creators through the banking system.
What Japanese deflation did and did not do.
http://www.international-economy.com/TIE_W06_Posen.pdf
Putting these dozen lessons from Japan’s deflation of the last decade together, what is the bottom line for monetary policymaking going forward? There is an asymmetry in the welfare effects of deflation and low levels of inflation, with deflation being worse, though it is not apocalyptic to fall into deflation. Still, there is nothing good about sustained deflation, not for restructuring or the banking system or for credibility, so central banks should go to great efforts to get out of it. Once a central bank is in a deflationary situation, it should show clear opposition to deflation, a willingness to use whatever means available (if the usual interest rate instrument is blocked) to reverse deflation, and a forward-looking commitment to being accommodative until inflation is solidly positive. Then the central bank will move expectations— and if it moves expectations, it will move outcomes in the desired direction.
Central banks under normal circumstances should get in place a commitment to a positive inflation definition of price stability, with a well-considered buffer zone between it and zero inflation. They should back that commitment with a promise that deviations from the practical definition of price stability will be symmetrically opposed. And at all times, central banks should keep the public focused on goals and outcomes, and not get hung up on the appearance of intermediate targets or policy instruments, which in the end the public and markets correctly discount as of little importance. No one reasonable fusses about what their plumber uses to stop a leak when their house is flooding, so long as the leak stops and stays stopped. You only fire the plumber if it keeps leaking
Central banks under normal circumstances should get in place a commitment to a positive inflation definition of price stability, with a well-considered buffer zone between it and zero inflation. They should back that commitment with a promise that deviations from the practical definition of price stability will be symmetrically opposed. And at all times, central banks should keep the public focused on goals and outcomes, and not get hung up on the appearance of intermediate targets or policy instruments, which in the end the public and markets correctly discount as of little importance. No one reasonable fusses about what their plumber uses to stop a leak when their house is flooding, so long as the leak stops and stays stopped. You only fire the plumber if it keeps leaking