is the act of stimulating
by increasing the money supply
or by reducing taxes
, seeking to bring the economy (specifically the price level) back up
to the long-term trend, following a dip in the business cycle
. It is the opposite of disinflation
, which seeks to return the economy back down
to the long-term trend.
Reflation, which can be considered a form of inflation
(increase in the price level), is contrasted with inflation (narrowly speaking) in that "bad" inflation is inflation above
the 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 of economic growth
where there is long-term growth in the economy and price level, which is widely accepted in economics. Just as disinflation
is considered an acceptable antidote to high inflation, reflation is considered to be an antidote to deflation
(which, unlike inflation, is considered bad regardless of its magnitude).
The term "reflation" can also refer to an economic policy
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 rates
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
Last edited on 12 April 2021, at 01:09
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