Five Common Errors about Deflation


  • Philipp Bagus Universidad Rey Juan Carlos. Address: Philipp Bagus. C/ Tren de Arganda 8D 5C. 28032 Madrid (Spain).



Deflation is generally considered as an evil that must be prevented. Economists as well are focusing on the question of deflation prevention. This paper examines the reasons for why deflation is considered as bad and refutes in this context five common errors concerning deflation: That deflation leads to an unfair redistribution, that deflation induces an decrease in production, that deflation induced price instability leads to chaos, that it is the cause of mass unemployment and can put the economy in a disastrous liquidity trap. It is concluded that the standard analysis of deflation must be revised.

Key words: deflation.

Clasificación JEL: E31

Resumen: Comúnmente se considera la deflación como algo malo que hay que evitar. También los economistas se esfuerzan en estudiar cómo se puede prevenir la deflación. Este artículo analiza las razones por las cuales se considera la deflación como algo malo y refuta en este contexto cinco errores muy difundidos sobre la deflación: que la deflación causa una redistribución arbitraria, que la deflación lleva a una reducción de la producción, que una inestabilidad de precios causada por la deflación produce caos, que es la causa de paro masivo y que puede poner a la economía en una trampa de liquidez desastrosa. Se concluye que, ante estos errores, hay que revisar el análisis estándar de la deflación.

Palabras clave: deflación.


BAGUS, Philipp (2004), «Deflation – When Austrians become Interventionists», Quarterly Journal of Austrian Economics, 6 (4), pp. 19-35.

BEERNANKE, Ben S. (2002), «Deflation: Making Sure “It” Doesn’t Happen Here», speech before the National Economists Club. Washington, D.C. November 21, 2002.

BYE, Raymond T. (1944), Principles of Economics, 4th ed., F.S.Crofts & Co: New York.

CARGILL, Thomas F. (2001), «Monetary Policy, Deflation, and Economic History: Lessons for the Bank of Japan», Monetary and Economic Studies (Special Edition), Institute for Monetary and Economic Studies, Bank of Japan.

COLANDER, David C. (1995), Economics, 2nd ed., Irwin: Chicago. DELONG, Bradford J. (1999), «Why We Should Fear Deflation», Brookings Papers on Economic Activity. March 25-26, 1999. Post-meeting draft.

GOODFRIEND, Marvin (2001), «Financial Stability, Deflation, and Monetary Policy», Federal Reserve Bank of Richmond Working Papers No. 01-01.

HAHN, Albert L. (1956), Common Sense Economics, Abelard-Schumann: New York.

HOPPE, Hans-Hermann. (2001), Democracy The God That Failed, Transaction Publisher: New Brunswick, New Jersey.

HUERTA DE SOTO, Jesús (2005), Dinero, Crédito Bancario y Ciclos Económicos, 3rd ed., Unión Editorial: Madrid. English edition, Money, Bank Credit and Economic Cycles, Ludwig von Mises Institute: Auburn, Alabama (2006).

HÜLSMANN, Jörg G. (2004), «The Optimal Quantity of Mo-ney», Quarterly Journal of Austrian Economics 6 (4), pp. 61-72.

— (2003), «Deflation and Liberty», unpublished manuscript. HUTT, William H. (1995), «The Significance of Price Flexibility», pp. 386-404 in: H. Hazlitt (Ed.), The Critics of Keynesian Economics, The Foundation for Economic Education: New York.

— (1979), The Keynesian Episode, Liberty Press: Indianapolis. KENT, Robert P. (1966), Money and Banking, Holt, Rinehart and Winston Inc.: New York-Chicago-San Francisco-Toronto-London.

KEYNES, John M. (1963), Essays in Persuasion, The Norton Library: New York.

— (1996), Breve tratado sobre la reforma monetaria, Fondo de Cultura Económica: México.

— (1936), The General Theory of Employment Interest and Money, Harcourt, Brace & World, Inc: New York.

KRUGMAN, Paul (1999), «Can Deflation Be Prevented»:

MELTZER, Alan H. (2000), «Monetary Policy In The New Global Economy: The Case of Japan», Cato Journal, Vol. 20, No. 1.

MILLER, Merton H., and UPTON, Charles W. (1986), Macroeconomics: a Neoclassical Introduction, University of Chicago Press: Chicago.

MISES, Ludwig von (1949), Human Action, Yale University Press: New Haven.

— (1981), Theory of Money and Credit, LibertyClassics: Indianapolis.

RÖPKE, Wilhelm (1995) «The Economics of Full Employment», pp. 362-386 in: H. Hazlitt, The Critics of Keynesian Economics, 2nd ed., The Foundation for Economic Edu-cation, Inc.: New York.

ROTHBARD, Murray N. (1990), What Has Government Done to Our Money?, 3rd ed., Mises Institute: Auburn, Alabama.

— (1993), Man, Economy, and State, Mises Institute: Auburn, Alabama.

— (2000), America’s Great Depression, Mises Institute: Auburn, Alabama.

SHIRATSUKA, Shigenori (2000), «Is there a Desirable Rate of Inflation?», IMES, Discussion Paper No. 2000-E-32, Bank of Japan.

STIGLITZ, Joseph E. (1993), Economics, 1st ed., W. W. Norton & Company: New York-London.

SVENSSON, Lars E. O. (2000), «How Should Monetary Policy Be Conducted in an Era of Price Stability?», Working Paper, NBER, No. w7516.

TAYLOR, John B. (2001), «Low Inflation, Deflation, and Policies for Future Price Stability», Monetary and Economic Studies (Special Edition), Institute for Monetary and Economic Studies, Bank of Japan.

TIGGES, Claus (2004), «Das Märchen von der Deflation»:




How to Cite

Bagus, P. . (2006). Five Common Errors about Deflation. REVISTA PROCESOS DE MERCADO, 3(1), 105–123.