Skip to:
  1. Main navigation
  2. Main content
  3. Footer
Economic Commentary

Perils of Price Deflations: An Analysis of the Great Depression

If a central bank adopts a zero inflation target, it would, in practice, occasionally deviate from that rate up and down, and the economy would experience episodes of mild inflation and deflation. Is deflation—a decrease in the level of prices—a cause for concern? Deflation can cause output to decline, but to what extent? This Economic Commentary explores how much of a problem deflation might be for modern economies by estimating the effect that massive price declines had on output during the Great Depression. We find that while deflation can cause output to decline, mild episodes of deflation are unlikely to be a problem.

The views authors express in Economic Commentary are theirs and not necessarily those of the Federal Reserve Bank of Cleveland or the Board of Governors of the Federal Reserve System. The series editor is Tasia Hane. This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License. This paper and its data are subject to revision; please visit for updates.

Suggested Citation

Carlstrom, Charles T., and Timothy S. Fuerst. 2001. “Perils of Price Deflations: An Analysis of the Great Depression.” Federal Reserve Bank of Cleveland, Economic Commentary 2/15/2001.