Prevention of Deflation

In the present commercial world, prevention of Deflation forms one of the primary concerns and activities of worldwide economists and experts. Generally, Deflation is considered to be a grave condition of a country’ s economy. Sometimes, it is regarded as a condition even worse than an economic depression. Hence, prevention of Deflation is essential, in order to restrict its spread as far as possible.

As a global phenomenon, Depression remains a persistent matter of worry for all countries across the world. In fact, Deflation was absent from world economy for more than half a century, after which it has abruptly re-appeared, knocking the doors of the finance ministries and the central banks in the modern industrial world. Following are considered to be a handful of basic, clear-cut measures adopted by the contemporary economies, to curb the growing tendencies of Deflation:

• Under modern economic conditions, the use of traditional instruments like fiscal and monetary policies has increased tremendously. These include monetary financing of the deficits on government levels and open market purchases of the government securities. Application of both the policies offers immense support to collective expenditures, ensuring maximum stability. This is done, by making best use of the available economic resources and steady and low inflation. There are some preventive actions which can be applied to evade the possibility and risk of Deflation. These actions are briefly stated below:

  • At the beginning, a buffer zone is maintained for the rate of inflation. Under normal circumstances, this buffer area should not make any attempt on its part, to thrust down inflation to zero.
  • Next, the organizations associated with the entire activity should take up the responsibility of assuring financial stability in the country.
  • This is followed by decrease in the rate of inflation by the central banks of the country, in an assertive and preemptive manner. This action must be taken at a time when the inflation rate is low and there is a sudden deterioration in the economic conditions of the country.

Deflation is born out of a combination of poor economic management and bad luck. This also includes the inability to synchronize fiscal and monetary policies together. In fact, a prolonged deflation is unwanted and unnecessary, giving evidence of policy failure. For preventing unnecessary Deflation, instruments and knowledge are to be simultaneously used by an economy.