The absence of deflation in the modern era has dramatically reduced the amplitude of business cycles since 1950 (Exhibit 2.1). Because inflation has generally stayed positive, it has been rare to see a year of negative nominal GDP growth. In fact, the financial crisis of 2008–2009 and the associated recession was the first instance of negative nominal GDP growth since the 1940s and the worst since the 1930s, helping to explain the unprecedented and highly controversial policy response at the time.
Its insane that an evolution of monetary policy can weed out such severe bugs. But how long is a zero deflation policy possible. Does the economy not build scaffolding on top of an artificially stable business cycle?
