should be common or that a policy close to the Friedman rule and thus some deflation is optimal. Finally, a formal ‘baby …

: rational bubbles and financial frictions. We explain why each of these building blocks is crucial to understand recent events …

are too low. In this environment, changes in investor sentiment or market expectations can give rise to credit bubbles …

occurs when unwanted deflation needs to be prevented or combated, but the central bank’s conventional monetary arsenal is …

After an absence of almost half a century, the spectre of deflation is once again haunting the corridors of central … banks and finance ministries in the industrial world. While preventing or combating deflation poses some unique difficulties … not present in preventing or combating inflation, deflation can be prevented and, if it has taken hold, can be overcome …

increased, we find that, as of September 2002, with the exception of Japan, there is no evidence of substantial deflation risks …. We also put the estimates of deflation risk for the United States, Germany and Japan into historical perspective. We find … that only for Japan there is evidence of deflation risks that are unusually high by historical standards. …

economy and escape deflation by a real depreciation of the domestic currency, a lower long real interest rate, and increased … the risk of overheating. Some conclusions for Japan are included. …