Euro zone: A reminder of what deflation really is

Interest rates and monetary policy in the euro zone are consistent with a situation of deflation. But it is important to keep in mind that deflation is really a situation where inflation is so low under the effect of weak demand that nominal interest rates cannot follow inflation downwards. The rise in real interest rates then leads to a further fall in domestic demand, a fall in asset prices and a fall in credit, because there is overindebtedness. This configuration was seen in the euro zone in 2009 and 2013, but no longer at all since 2015. Curiously, monetary policy in the euro zone has become much more expansionary since the risk of deflation disappeared.