Deflation has emerged as a new concern for Asian policy makers. The traditional view is that deflation can lead to a vicious cycle of falling demand and prices, and is thus a dangerous condition. However, another school of thought emphasizes the role of positive supply shocks and takes a more...

This paper asks how Asia should prepare for the disorderly correction of global imbalances. It recommends tightening monetary policy and allowing Asian currencies to appreciate as a way of achieving a better balance between internal and external demand. Leaving the overall level of demand...