The Bitcoin FAQ entry on deflation I feel could be a lot better. In essentially claims that nobody knows what will happen with a "deflationary model" (which Bitcoin doesn't really have, IMHO, it's designed to be stable). I think I'm going to propose a rewrite of it soon to be less passive.
Two months ago a couple of economists working for the IMF published this draft paper:
http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdfIt does not represent the official views of the IMF. However the abstract is quite clear:
At the height of the Great Depression a number of leading U.S. economists advanced a
proposal for monetary reform that became known as the Chicago Plan. It envisaged the
separation of the monetary and credit functions of the banking system, by requiring 100%
reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this
plan: (1) Much better control of a major source of business cycle fluctuations, sudden
increases and contractions of bank credit and of the supply of bank-created money.
(2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt.
(4) Dramatic reduction of private debt, as money creation no longer requires simultaneous
debt creation. We study these claims by embedding a comprehensive and carefully calibrated
model of the banking system in a DSGE model of the U.S. economy. We find support for all
four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state
inflation can drop to zero without posing problems for the conduct of monetary policy
This dovetails nicely with the findings of some economists working at the Minneapolis Fed, who studied the question of deflation in 2004:
http://minneapolisfed.org/research/sr/sr331.pdfAre deflation and depression empirically linked? No, concludes a broad historical study of inflation and real
output growth rates. Deflation and depression do seem to have been linked during the 1930s. But in the rest
of the data for 17 countries and more than 100 years, there is virtually no evidence of such a link.
Bitcoin implements a steady-state model that is essentially "full reserve banking" or the Chicago Plan, but implemented by eliminating banks and having a global consensus on inflation rather than laws that require 100% reserve ratios.
I haven't read the full IMF paper yet. I hope to get a chance to do so soon. If anyone wants to beat me to it and provide your opinions, go right ahead.
