Bernanke Doctrine

The Bernanke doctrine refers to measures, identified by Ben Bernanke while Chairman of the Board of Governors of the United States Federal Reserve, that the Federal Reserve can use in conducting monetary policy to combat deflation.

In 2002, when the word "deflation" began appearing in the business news, Bernanke, then a governor on the Board of the Federal Reserve, gave a speech about deflation entitled "Deflation: Making Sure "It" Doesn't Happen Here." In that speech, he assessed the causes and effects of deflation in the modern economy. Bernanke states:

"The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand – a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending—namely, recession, rising unemployment, and financial stress."

Bernanke emphasized that Congress gave the Fed responsibility for preserving price stability (among other objectives), which implies avoiding deflation as well as inflation. He stated that deflation is always reversible under a fiat money system. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve monetary policy goals). Bernanke asserted that the Fed "has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief".

To combat deflation, Bernanke provided a prescription for the Federal Reserve to prevent it. He identified seven specific measures that the Fed can use to prevent deflation.

1) Increase the money supply (M1 and M2).

"The US government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost." "Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation."

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