Reflation is used to describe a return of prices to a previous rate of inflation. One usage describes an act of stimulating the

economy An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with th ...

by increasing the

money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...

or by reducing

taxes A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, o ...

, seeking to bring the economy (specifically the price level) back ''up'' to the long-term trend, following a dip in the

business cycle Business cycles are intervals of expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are measured by examin ...

. It is the opposite of disinflation, which seeks to return the economy back ''down'' to the long-term trend.

Overview

In this perspective, reflation, is contrasted with inflation (narrowly speaking) ''above'' the some long-term trend line, while reflation is a recovery of the price level when it has fallen ''below'' the trend line. For example, if inflation had been running at a 3% rate, but for one year it falls to 0%, the following year would need 6% inflation (actually 6.09% due to compounding) to catch back up to the long-term trend. This higher than normal inflation is considered reflation, since it is a return to trend, not exceeding the long-term trend. This distinction is predicated on a theory that

economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate o ...

, where there is long-term growth in the economy and price level, is both sustainable and desirable. Just as disinflation is considered an acceptable antidote to high inflation, reflation is considered to be an antidote to

deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflatio ...

(which, unlike inflation, is considered bad regardless of its magnitude). Reflation has also found usage in forensic economics to describe a return to monopolistic (exorbitant) price paths following correction. Inflation can be regarded as expansion of prices beyond previous levels, while reflation can describe return to a previous pricing strategy.

Policy

The term "reflation" can also refer to an

economic policy The economy of governments covers the systems for setting levels of taxation, government budgets, the money supply and interest rates as well as the labour market, national ownership, and many other areas of government interventions into the ec ...

whereby a government uses fiscal or monetary stimulus in order to expand a country's output. This can possibly be achieved by methods that include reducing tax, changing the money supply, or even adjusting

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...

s. Originally, it was used to describe a recovery of price to a previous desirable level after a fall caused by a recession. Today it also (in addition to the above) describes the first phase in the recovery of an economy which is beginning to experience increasing prices at the end of a slump. With rising prices, employment, output and income also increase till the economy reaches the level of

full employment Full employment is a situation in which there is no cyclical or deficient-demand unemployment. Full employment does not entail the disappearance of all unemployment, as other kinds of unemployment, namely structural and frictional, may remain. F ...

References

External links

* Inflation Economic bubbles Macroeconomic policy {{macroeconomics-stub

Overview

Policy

See also

References

External links