BIS central bankers’ speeches  1  Following the financial crisis, of course, the developed world has been in exactly that position: the neutral real rate of interest has been extremely depressed, official interest rates have been pushed to the zero lower bound and central banks have employed unconventional means of easing monetary policy. Were it to occur right now, sustained deflation would therefore pose more of a risk than at times when the neutral real rate was higher. But, in my view, those risks are nonetheless relatively contained. For one thing I think the evidence suggests that unconventional policy is effective: even if they don’t circumvent it entirely, asset purchases help soften the constraint of the zero lower bound. Second, with the financial system gradually improving my guess is that the neutral real rate of interest is more likely to rise than fall over the next couple of years. Third, and most importantly, I think the chances of a sustained and widespread deflation are in any case low. That’s certainly what the international experience suggests. That experience is substantial: we have annual CPI data since 1960 for over 70 countries, a total of over 3,000 data points. In only 70 cases (barely 2% of the sample) have consumer prices actually fallen and in the majority of those inflation was positive the following year.
“Core” inflation is still running at over 1% and, barring another steep decline in food and energy prices over the next year, headline inflation is likely to rise quite steeply in early 2016. I’m also struck by the rarity of persistent deflation in the past 15, particularly amongst countries with an independent monetary policy. As we’ve seen, long periods of falling prices were perfectly common during the Gold Standard. That’s inevitable under a commodity peg if, over any period of time, the commodity itself is in fixed supply. The same was true in other countries at the time and, infamously, during the Great Depression. It was only when Britain came off gold, in 1931, that its nominal income started to accelerate 16. And since the Second World War, and the abandonment of commodity standards, positive inflation has been the norm – so much so, in fact, that the commonly cited example of the Japanese deflation is almost unique. Chart 12a Deflation episodes are rare  Chart 12b Even rarer in countries with floating exchange rates  Source: Bordo and Eichengreen, IMF and OECD  Source: Bordo and Eichengreen, IMF and OECD  Note: Sample 1960-2010; 3300 observations  Note: Sample 1960-2010; 3300 observations. 15  A very recent paper by Claudio Borio and co-authors at the BIS makes the same point (Borio et al. (2015)); see also Broadbent et al (2010). 16  For more on the contractionary effect of the Gold Standard during the Great Depression, see Eichengreen (1996).