A Lecture At The George Washington University - 1142 Words

The Chairman’s first lecture at The George Washington University highlighted the damage deflation caused during the Great Depression. The gold standard and errors by monetary policymakers in the period exacerbated a difficult situation and allowed deflationary forces to spread financial distress and panic in the banking sector. The Chairman argued that had the Federal Reserve expanded the money supply during the Great Depression, deflation could have abated and the severity of the financial crisis would have been avoided. In recent years, deflation has returned to the forefront of economic discussions as an increasing number of economies have faced the potential of falling prices. Deflation is a serious concern of monetary policymakers.†¦show more content†¦The lectures covered the extended period of low interest rates from 2002-2004 and the unorthodox policies taken during and after the financial crisis, in part to avoid a deflationary spiral. One of the most consistent defenses against deflation is for a central bank to target an inflation rate greater than zero. The Federal Reserve’s current inflation target is 2% and has informally been at that rate for quite some time. This nonzero target provides a cushion for policymakers: should inflation decrease due to an unexpected shock to aggregate demand, prices should not immediately start falling. This allows policymakers to act with easy money when inflation reaches 1 or 0%, thus avoiding deflation. Yet, during the last two recessions in the United States, the 2% inflation rate did not prevent significant fear of deflation. Extraordinary action was required, and many economists argue that the low interest rate policy following the 2001-2002 recession contributed to the housing bubble that was inflating at that time. It is not yet known what the impact will be from the unorthodox policies taken in response to deflation fears in 2009-2010. Based on these experie nces, it may be time to consider alternative inflation targets to provide greater insulation from deflationary pressures. Policy Proposal: Increase the