Gauging Risks for Deflation (Decressin and Laxton)

The paper discusses deflation risks and policy options. It underscores the crucial role of financial sector policies in remedying deflationary pressures directly and indirectly, by enhancing the effectiveness of monetary and fiscal policies. Supportive fiscal policies are likely to be needed to prevent a deflationary episode becoming entrenched. Monetary policies measures include operating in a broad range of financial markets to relieve credit rationing, and to lower risk spreads and term premiums. Central bank communication also plays an important role in this process.