Monday, April 28, 2014

Janet Yellen on deflation

According to Yellen, deflation is detrimental to both businesses and households: businesses are impacted because deflation increases real interest rates, dis-incentivizing them from capital formation and increasing output and creating jobs, which is counter-productive to the Fed’s monetary stimulus efforts to induce economic recovery. 

Further, when interest rates increase, this increases the debt burden for households and borrowers alike, which impacts consumption.