From Introduction:

Are falling prices a bad thing? Many would say no. Back in the 1980s, an international phone call was very expensive. Today, even video telephony is more or less free. Who would not want to benefit from the positive income effects of innovation? Mark Carney, Governor of the Bank of England, considered falling prices to be “unambiguously good”. However, the idea that deflation is mostly to be welcome is at odds with today’s mainstream economic thinking. Standard macroeconomic textbooks see deflation as basically detrimental and, as a consequence, monetary authorities around the World are increasingly targeting “inflation goals”, the most prominent case being Japan.

The fight against deflation has been the major occupation of Japanese monetary policy for about two decades. It has been a struggle which very much resembles Don Quixote’s tilting at windmills – fighting an imaginary enemy in vain efforts. There has never been a clearly stated answer as to why deflation is bad and needs to be avoided and overcome. There are, of course, theoretical scenarios and models showing that deflation can be very harmful. But do they apply to present-day Japan? Also, despite extreme and unorthodox policy measures leading to a historically unprecedented almost eightfold (!) expansion of the monetary base, Japan has not been able to achieve its two per cent inflation target. Common sense would suggest that if one misses a goal for twenty years, there must be either something wrong with the goal or with the instruments applied or both. This paper discusses the two fundamental questions raised by twenty years of fighting deflation: Is deflation generally harmful and has it been harmful in the case of Japan? Why has extreme monetary expansion been unable to achieve inflation?