the nominal price level, which could be quite costly to the degree that some prices and wages might not easily adjust downward. From the late nineteenth century until World War II, long downward trends in the price level and shorter periods of falling price levels were common in the industrialized world. But they were generally associated with falling output and rising unemployment. Declines in the general price level have been rare in industrialized countries since the end of World War II, although Sweden did sustain a mild deflation in 1996 with few apparent negative consequences. Larger deflations could be more costly, notes Princeton economist Ben Bernanke, in part because the potential for deflation is not written into most contracts. Interest rates cannot be negative, so the real interest rate can quickly become high when nominal prices are falling. And the ability of monetary policy to respond to recessionary shocks may be constrained. Some cite Japan's recent experience as an example of how low nominal interest rates (close to zero) were less stimulative than might be expected because prices were falling. MONEY AND MORALS The debate among policy makers and economists on inflation's impact at 3 percent versus zero percent is quite vigorous, at present, but no clear consensus has been reached. What the public believes is also unclear. Opinion polls since World War II consistently show that Americans regard inflation as a more serious problem than unemployment. Evidence from a number of public opinion surveys is contradictory, however, on whether the public would be willing, if necessary, to sustain higher levels of unemployment and a loss of output to achieve price stability. What the public believes about inflation matters because such beliefs affect the economy's performance. Once inflati...
