Monetary policy should prevent deflation and avoid a bad equilibrium

a column by Olli Rehn for VOX: CEPR’s Policy Portal

It has been recently suggested by a group of seasoned central bankers that there has been no danger of a deflationary spiral in the euro area.

This column argues instead that the threat of a deflationary spiral was avoided by several reinforcements of the degree of monetary policy accommodation since 2015, and that a key lesson of monetary policy of the last ten years is that timely action is essential to avoid the sort of profoundly harmful equilibrium that might arise from prolonged low inflation and zero interest rates.

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