BIS central bankers’ speeches  9  The international data on consumer prices are relatively rich: we have annual numbers for over 70 countries, most of them back to 1960 17. In all, across countries and years, there are 3,300 separate post-war observations. In only 70 of these – barely 2% of the sample – has inflation actually been negative (Chart 12a); the majority of these “deflations” (46 out of 70) have lasted no more than a year, many of these shorter episodes coinciding with falls in oil prices; of the 24 deflations lasting two or more years, 20 have been in economies with fixed exchange rates, most of those emerging economies; among countries with freely floating exchange rates, only Bahrain and – somewhat more famously – Japan have experienced protracted deflations, both of them twice (Chart 12b). This is not a common occurrence. A credible monetary policy reduces the persistence of movements in inflation Why might deflations be rarer in countries with floating exchange rates, and in emerging economies, and should this provide any reassurance today? Yes, I think – to a degree. One plausible reason for this pattern is that countries with fixed exchange rates give up autonomy to control their own rate of inflation. Instead, domestic inflation is determined by (i) inflation in the country to which their exchange rate has been fixed (most often the US) and (ii) forces affecting their real exchange rate.
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.