The Great Depression and Japan's more recent experience convinced some central bankers that deflation is dangerous. This report, however, argues that deflation is an acceptable economic outcome if it is occasional, small in magnitude, and accompanied by strong productivity growth. They analyze the economic impact of deflation and conclude that while the zero, or very low, nominal interest rates that often accompany deflation can cause problems, many of the problems attributed to deflation are not unique to falling prices per se. Some business people mistakenly fear deflation when the real issue is the decline in the price of the goods and services they produce relative to other prices. Furthermore, some of the disruptions attributed to deflation arise not because the price level is falling but because prices are rising more slowly than anticipated. A better understanding of the dangers of deflation is especially pertinent in light of modern central banks' near-universal commitment to low inflation and their increasing use of inflation targeting as an operational framework.
The year of disinflation
A review of 1982 monetary policy decisions and economic conditions, with an analysis of the continuing 1981 recession and the process of disinflation.
Adapting, Evolving, Learning
The Federal Reserve is an adapting, evolving, and learning organization. In the Federal Reserve Bank of Cleveland's 2012 Annual Report, we take a close look at how it has changed since its creation 100 years ago. Our essay describes some of the seminal episodes that have influenced the Federal Reserve as we know it today. Times have changed, economic theories have developed, and the Federal Reserve has adapted to meet new demands. In fact, over the course of its 100 years, the Federal Reserve has proved not only a willingness to change, but also an appetite for embracing and initiating change when necessary to carry out our mission. The Federal Reserve was founded in 1913 in response to a severe banking crisis in 1907. Policymakers of the era believed that a central bank should be created to calm financial panics, supervise banks, and provide a stable currency. Those responsibilities largely endure, but many details have been refined and others added to reflect the growing complexity of the financial system in which the Federal Reserve operates. The evolution has occurred within the framework of evolving public expectations of what a central bank can and should do. From a focus on financial stability to an explicit objective for inflation?the Federal Reserve's recent actions are rooted in history. We cannot hope to understand modern-day Federal Reserve policies without this context. The principles that guide current policies originated in lessons from the Great Depression, from stagflation in the 1970s, and from the savings and loan crisis of the 1980s, among others. I think it is safe to say we are still absorbing many lessons from the financial crisis of 2008, even as we incorporate wisdom gained in previous crises into our immediate response to this most recent episode.
AUTHORS: Pianalto, Sandra
Can economics help save our schools?
Education and the flexibility to adapt to change are the most important factors in stimulating innovation and economic growth. Educated societies possess people who have the skills that enable them to induce change and then to successfully adapt.
Theory ahead of rhetoric: measurement and the “New Economy”
The annual report essay discusses the measurement system used to track U.S. economic activity, and why it is not yet up to the task of effectively measuring aspects of economic activity that contribute the most to long-term economic growth. For historical reasons, our measuring system has concentrated on expenditure and output; going forward, though, it will need to gauge the true economic values of land, labor, and capital more accurately. Contemporary theories about the business cycle and economic growth indicate that conventional methods of measuring these factors fall short of what we really need to understand how our economy is operating
2013 Annual Report Why Inflation Is Very Low, and Why It Matters
One of the Federal Reserve?s mandates is maintaining stable prices. During my more than three decades in the Federal Reserve System, the focus has been primarily on avoiding high and variable inflation, and over most of that period, the Federal Reserve has successfully fulfilled its objective to keep inflation in check. More recently, however, our attention has turned to a less familiar concern?persistently low inflation. While high inflation has well-known costs for economic performance, the problems posed by persistently low inflation can be equally harmful. As its title promises, this year?s annual report essay examines why inflation is low, and why it matters. First, our researchers explore the relatively new phenomenon of low inflation. High inflation rates have been the focus of attention for the last several decades. It has been only in the aftermath of the most recent financial crisis that the Federal Reserve has had to look more carefully at how to guard against both overshooting and undershooting our inflation objective. Our researchers explain why the US economy is currently experiencing a bout of sustained low inflation. Using a range of tools, our researchers have identified two main sources: slow economic growth, which has put very little upward pressure on prices and wages; and special, temporary forces that have held back some prices, such as the deceleration of medical care costs.
AUTHORS: Clark, Todd E.; Knotek, Edward S.
Altered states: a perspective on 75 years of state income growth
According to a study featured in the Federal Reserve Bank of Cleveland's 2005 Annual Report, differences in state income levels can be explained largely by two factors: innovation and workforce skills. The study's findings suggest that increasing a region's knowledge base should be a primary component of economic development strategies.
AUTHORS: Schweitzer, Mark E.; Shane, Scott; Bauer, Paul W.
A puzzle for the world
An analysis of the strength of the U.S. dollar in 1984 and imbalances in U.S. international transactions.
Innovation, growth, and economic policy in an environment of change
In this report, we explore innovation as the engine of economic prosperity and argue that the greatest strength we possess is our ability to induce and embrace change, from the integration of new technologies to new peoples and cultures. Indeed, if we hope to remain an ongoing, vital player in the global economy, flexibility is likely to be our most valuable asset.
Price stability: why we seek it and how best to achieve it
Federal Reserve Bank of Cleveland President Sandra Pianalto explains why price stability is essential for maximum employment and how the adoption of a numerical target for inflation may improve the central bank?s ability to achieve both objectives. Find the essay, along with Frequently Asked Questions about inflation.
AUTHORS: Pianalto, Sandra