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What are there other consequences of deflation?
Mankiw presents an analysis of six separate costs of inflation: shoe-leather costs, menu costs, relative-price variability and the mis-allocation of resources, inflation-induced tax distortions, confusion and inconvenience, and arbitrary redistributions of wealth. If inflation leads to these problems, does it follow that deflation (the opposite of inflation) makes these costs disappear. Put more generally, if inflation is bad, does it follow that deflation is good?
Using the "six costs of inflation" detailed by Mankiw, explain the likely effects of deflation. Are there other consequences of deflation (not included in the six costs identified by Mankiw) that we should fear as consequences of a substantial deflation?
3 Answers
- Anonymous7 years ago
When deflation occurs, the cost of widgets go down, but in sustained cases of deflation this also means that revenues/profits go down and this creates a dilemma: 1) wages also need to go down (rarely happens), or 2) jobs need to be cut. Basically unchecked and sustained deflation lead to higher unemployment… So while getting cheaper shoes in the early days was great, being fired down the track due to the shrinking economy is not so good.
and when we see unemployment levels go up, what generally follows is decreased consumer confidence… so spending grinds to a halt… and then we see greater level of unemployment etc, share process drop, house values tank and in extreme cases we see runs on the bank etc.
If you want a good case study check out Japan's issues with deflation in the early 2000s. That will provide you all you need to write a good report.
- megLv 77 years ago
Yes all of them and there is an additional cost as asset become less valuable loans become less secure and if deflation is large it will cause a financial crisis like happened in 2008 when the price of housing fell.
- Anonymous7 years ago
Yes, the costs on your list will disappear because there is no demand and therefore no production. And the things go to the factor market to fight to survive, because the cut will go down and down. It will be harder to be up again. It's a cycle, and the bad one.
