The anti deflation bias

Abstract

Deflation is widely feared and opposed. This paper provides arguments to explain the anti-deflationary bias. It is argued that governments favour inflation, that the main deflation theories have influenced negatively the public opinion on deflation, and that rent-seeking behaviour and group formation explains why the opposition to deflationary redistribution is stronger than the opposition to inflationary redistribution. Moreover, psychological concepts, such as anchoring, the endowment effect or the availability heuristic have contributed to the fear of deflation by causing a money illusion and a equalisation of deflation and recession.

Principles of Monetary & Financial Sustainability and Wellbeing in a Post-COVID-19 World: The Crisis and Its Management

“…Certain reversion processes inevitably follow and reveal the investment errors committed, along with the need to acknowledge them, abandon unsustainable projects, and restructure the economy by transferring productive factors (capital goods and labour) on a massive scale from where they were used in error to new, less ambitious but truly profitable projects. The recurrence of the cycle can be explained both by the essentially unstable nature of fractional-reserve banking as the main provider of money in the form of credit expansion and by the widespread pro-inflationary and anti-deflationary bias [94,95] of theorists, political authorities, economic and social agents, and above all, central bankers, who view economic prosperity as a goal to be pursued in the short term at all costs and see monetary and credit injections as a tool which cannot, under any circumstances, be dispensed with. Therefore, once recovery is well underway, sooner or later the authorities again succumb to old temptations, rationalize policies that have failed again and again, and reinitiate the whole process of expansion, crisis, and recession, and it all begins again.…”