Neither theory nor history establish a clear connection between deflation and poor economic activity. The only evident negative episode seems to be the substantial deflation that occurred during the Great Depression. But at that time prevailing monetary conditions were tight, and no precedent exists of significant deflation under highly expansionary monetary conditions.
2 Regardless of their effectiveness in attaining desired results, extremely loose monetary policies may generate increasing risks and unintended consequences. Low interest rates can result in excessive risk-taking, overleverage and the channeling of credit to projects with low productivity. The discouragement of saving hurts retirees, as well as pension funds and insurance companies, which could face difficulties meeting long-term liabilities.