No. of Recommendations: 16
Is anyone aware of an example/case study of a country that did not expand their money supply at all during healthy economic times except to step in to stave off deflationary spirals during severe recessions? I'd love to read about it.
I think it's more about asymmetrical risk. Deflation is more dangerous than inflation. Perhaps better would be to look for examples that a country slipped into deflation and couldn't get out, and the economy had real problems. There are several such examples.
Fortunately, there are tools that will bring inflation down. Draining liquidity in a variety of ways, usually starting with higher interest rates, but perhaps also including changes to bank reserve requirements, QE, twist, tax changes, etc. Some of them are painful, but they do work.
However it is maddeningly difficult to get an economy out of deflation. This is very surprising...it would seem to be the easier problem--surely helicopter money would do it? But in the real world it seems not. Once the pervasive *mood* of deflation sets in, a country's economy can get really stuck in the muck.
Given the asymmetrical risk, it makes sense to target a positive number rather than zero or a slightly negative one. (a positive number has other benefits too, but this is just the deflation-avoidance reason).
Jim
