Deflation in Europe?

January 15, 2014

Tom Cooley and Kim Schoenholtz have a new piece up at CNBC. As they say:

The great promise of the European common currency was that a single disciplined central bank could end the persistent inflationary bias in much of Europe. How things have changed! The latest data show inflation in the euro area has slowed well below the European Central Bank’s stated goal [of 2%]. It is not out of the question that the region could sink into a sustained deflation.

By deflation we mean negative inflation. There’s some question about its consequences, but there are well-documented periods in which deflation and poor economic performance came together, notably the US in the 1930s and Japan in the 1990s.

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