The opinions reflect only those of the author. 2  In the United States, the debate is well captured by the two editorials that appeared in the New York Times on 4 May 2009: one by Paul Krugman arguing that Japan-style deflation loomed; and the other by Allan Meltzer fearing a return of 1970s inflation: http://www.nytimes.com/2009/05/04/opinion/. See also The Economist of 9 May 2009, page 15. The risk of global deflation has been pointed out in several articles by Nouriel Roubini (www.rgemonitor.com). Inflation risks in Europe and globally were flagged by German Chancellor Angela Merkel in a speech in Berlin on 2 June 2009 (http://www.bundesregierung.de/nn_1498/Content/DE/Rede/2009/06/2009-06-02-merkel-insm.html). BIS Review 81/2009  1  thorough examination of the risks, in much the same way as a disease calls for a sound diagnosis if it is to be properly treated. I will start the discussion by explaining how deflationary risks should be monitored and assessed by central banks, in particular with respect to the current situation. I will then turn to inflation expectations, over the short and medium term, to assess in particular how well they are anchored to the objective of price stability. Then I will consider how monetary and credit aggregates can be of use in the current conditions to assess the balance of risks. I will conclude with the monetary policy actions required to ensure price stability in an environment subject to downward and upward pressures to price stability. 1.
In contrast to developments in M3, the growth rate of the narrow monetary aggregate M1 has – after a trough in the third quarter of 2008 – started to rise again, and reached 5.3% in the first quarter of 2009. While M1 developments usually prove inferior to M3 developments in terms of their information content about future inflation, in the case of the euro area they have traditionally exhibited good leading indicator properties for future real GDP growth. Taken per se, such a development would also speak against a deflationary scenario and might offer valuable insights into the timing of the recovery. To conclude, monetary indicators provide important information to try understanding the likelihood of different scenarios ahead. In this respect, the real-time problem which is always prevalent in monetary analysis – but also in other types of analysis – becomes more serious in a financial crisis. 4. Short and long term policy responses to the crisis  There are inevitable challenges associated with policy actions in times of crisis. Central banks around the world have embarked on untested areas of monetary policy-making. Expansionary fiscal policies and government interventions to stabilise the financial sector are expected to dramatically increase public debt. This could pose a severe threat to the sustainability of public finances and eventually to macroeconomic stability. To preserve macroeconomic stability over the medium term, there is a need for careful monitoring of the policy stimulus over the policy-relevant horizon, combined with well-designed exit strategies from non-standard policy-making.