Tag Archives: Effective Lower Bound

How does the scope for policy loosening affect the risk of deflation?

Alex Haberis, Riccardo M Masolo & Kate Reinold

Inflation is currently very low in the UK (indeed briefly dipping into negative territory in April), naturally raising speculation about whether we will experience persistent deflation in coming years. This post illustrates that the probability of deflation is raised further, and the likely duration of any deflation increased, if one thinks that there are limits on how far the Monetary Policy Committee (MPC) could loosen policy in the face of new shocks. We also explore how the current situation differs from other episodes since the crisis when the risk of deflation has been similarly elevated.

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Filed under Macroeconomics, Monetary Policy