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Abstract

In this text, we analyze the risk of the apparition of a deflationary dynamics in Europe. Deflation must first be defined: in modern economies, it consists mostly in a reduction in inflation, to the point where real interest rates start increasing, worsening the situation of borrowers and slowing down investment. This type of dynamics appears, like in Japan in the 1990's, after an adverse shock, when monetary policy reacts too slowly in the presence of excess capacity or of dis-adjustments of exchange rates. One can currently observe a situation of world-wide excess capacity in manufacturing, the under-evaluation of Asian currencies (specially the Chinese), but monetary policy has everywhere become expansionary. The large increase in the supply of liquidity by central banks does not lead to an increase in the prices of goods, but to an increase in asset prices.

Patrick Artus is the Research and Studies Director and the Head of Market Research within CDC IXIS.