Quarterly Journal of Austrian Economics

Deflation and Economic Growth: The Great Depression as the Great Outlier


Quarterly Journal of Austrian Economics 20, no. 2 (Summer 2017)

ABSTRACT: This paper deals with the relationship between deflation and economic growth. Although there are numerous theories on the potential effects of deflation on real output, empirical evidence in this field is still incomplete. In order to explore the relationship between prices and output in a more comprehensive way, I use a large panel data set of 20 countries over roughly 150 years, which contains frequent deflationary episodes. Since mainstream macroeconomists often refer to alleged bad historical experience with deflation, I employ an econometric model to examine both contemporaneous and lagged correlation between prices and output. There are two important results. First, there is no general relationship between price growth and output growth. Coefficient estimates have very small magnitude in both the whole sample and in different monetary regimes. Second, well-known episodes of deflation differ a lot. The Great Depression is the only period where deflation seems to be strongly associated with recession. By contrast, Japan in the 1990s and 2000s bears no resemblance to it. Here, both empirically and theoretically, deflation is highly unlikely to have caused economic stagnation.

KEYWORDS: deflation, price level, economic growth, monetary systems, panel data, economic history


Ryska, Pavel, “Deflation and Economic Growth: The Great Depression as the Great Outlier,” Quarterly Journal of Austrian Economics 20, no. 2 (Summer 2017): 113–145.

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