In this respect, the historical evidence supports the conclusion that monetary aggregates can play an important role when inflation is low or negative and the nominal interest rate is constrained by the zero lower bound. 4 With regard to policy implementation, the old saying “prevention is better than cure” is applicable also when deflation risks concretely emerge.
The potentially complex deflation dynamics suggest that the central bank should act promptly and, possibly, in a pre-emptive fashion. Acting decisively and early, the central bank can reduce the probability that the zerointerest rate becomes a binding constraint and that conventional monetary policy becomes ineffective.