Whenever someon mentions the deal with deflation, people should just start linking this study from the Minneapolis Fed:
http://www.minneapolisfed.org/research/sr/sr331.pdfHere we examine the empirical relationship between deflation and depression in a broad
historical context, including but not limited to the Great Depression. We use a panel data set on
inflation and real output growth for 17 countries and more than 100 years. To focus on mediumterm
fluctuations, we break the time series on inflation and real output growth for each country
into five-year episodes, and for each episode, we compute the average annual inflation rate and the
average annual real output growth rate. For any episode, we define a deflation as a negative average
inflation rate and a depression as a negative average real output growth rate. Throughout, we
restrict attention to moderate inflations, those with average annual inflation below 20 percent.
Our main finding is that the only episode in which we find evidence of a link between de-
flation and depression is the Great Depression (1929—34). We find virtually no evidence of such
a link in any other period.
The inflation argument is dead, both logically and empirically.