where questions of deflation traps become relevant, particularly in countries where the natural interest rate has come down to very low levels. policy must work at keeping price expectations from falling too far, just as hard as it worked to get expectations down from excessive levels in earlier times, by articulating goals clearly, and being seen to take action consistent with achieving those goals. fourth, if, despite the efforts of monetary policy, persistent deflation does become embodied in expectations and the zero interest rate does become, or threaten to become, a binding constraint, there will be a role for other policies. if there are structural rigidities which reduce the returns to capital, see'the mpc and uk economy : should we fear the d - words? ', speech by charles bean, chief economist, bank of england, to the emmanuel society, london, november available at http : / / www. bankofengland. co. uk / speeches / speech182. pdf for example, in a deflationary environment, these things will hamper macro policy's efforts to engender recovery. so policies which address any such problems would be important. these would include making sure that excess capacity is rationalised by allowing the failure of the weakest suppliers, so that the most efficient surviving producers can expect to earn a reasonable return. further, the active use of fiscal policy to promote recovery would be quite in order in the case of an entrenched deflation, especially in countries where fiscal consolidation had been achieved during the good times. in a situation where investors saw little return to private investment, it is hard to believe there would not be good economic and social returns to various forms of public investment. hence there would be, in this scenario, a strong case on short - term stabilisation grounds for the government to borrow and invest. conclusion i am not sure there is any more one can sensibly say about deflation at present. the fact that we are talking about the possibility of it at all is a remarkable change from only a few years ago. insofar as that means that the'great inflation'is well and truly finished, that is a good thing, provided of course that we are alert to the new sorts of risks which can emerge. there is probably a bit too much emotive baggage which is carried about with the word'deflation '. for the average country, a short - lived experience with mild deflation, if it occurred, would be not

in its programs to support the functioning of key credit markets, including the commercial paper market and the market for asset - backed securities. in my view, the use of section 13 ( 3 ) in these contexts is well justified in light of the breakdowns of these critical markets and the serious implications of those breakdowns for the health of the broader economy. as financial conditions improve and circumstances are no longer " unusual and exigent, " the programs authorized under section 13 ( 3 ) will be wound down, as required by law. other components of the federal reserve's credit programs, including our lending to depository institutions, liquidity swaps with other central banks, and purchases of agency securities, make no use of the powers conferred by section 13 ( 3 ). in a distinct set of activities, the federal reserve has also used its section 13 ( 3 ) authority to support government efforts to stabilize systemically critical financial institutions. the federal the federal reserve invoked this provision twice in the 1960s to authorize lending but no credit was drawn. primary dealers are broker - dealers that trade in u. s. government securities with the federal reserve bank of new york. the new york fed's open market desk engages in trades on behalf of the federal reserve system to implement monetary policy. most other major central banks already provide short - term credit to a broader range of financial institutions, so in making this change, the fed was conforming to international practice for the period of the financial emergency. reserve collaborated with the treasury to facilitate the acquisition of bear stearns by jpmorgan chase & co. and to prevent the failure of the american international group ( aig ), and we worked closely with the treasury and the federal deposit insurance corporation to help to stabilize citigroup and the bank of america. in the cases of bear stearns and aig, as part of a strategy to avoid impending defaults by the companies, the federal reserve made loans against pools of collateral. activities to stabilize systemically important institutions seem to me to be quite different in character from the use of section 13 ( 3 ) authority to support the repair of credit markets. the actions that the federal reserve and the treasury have taken to stabilize systemically critical firms were essential to protect the financial system as a whole, and, in particular, the financial risks inherent in the credits extended by the federal reserve were, in my view, greatly outweighed by the risks that would have been faced by the financial system and the economy had we