<http://www.federalreserve.gov/pubs/ifdp/2002/729/default.htm>
>International Finance Discussion Papers
>Preventing Deflation: Lessons from Japan's Experience in the 1990s
>Alan Ahearne; Joseph Gagnon; Jane Haltmaier; Steve Kamin
>2002-729 (June 2002)
>
>Abstract: This paper examines Japan's experience in the first half
>of the 1990s to shed some light on several issues that arise as
>inflation declines toward zero. Is it possible to recognize when an
>economy is moving into a phase of sustained deflation? How quickly
>should monetary policy respond to sharp declines in inflation? Are
>there factors that inhibit the monetary transmission mechanism as
>interest rates approach zero? What is the role for fiscal policy in
>warding off a deflationary episode? We conclude that Japan's
>sustained deflationary slump was very much unanticipated by Japanese
>policymakers and observers alike, and that this was a key factor in
>the authorities' failure to provide sufficient stimulus to maintain
>growth and positive inflation. Once inflation turned negative and
>short-term interest rates approached the zero-lower-bound, it became
>much more difficult for monetary policy to reactivate the economy.
>We found little compelling evidence that in the lead up to deflation
>in the first half of the 1990s, the ability of either monetary or
>fiscal policy to help support the economy fell off significantly.
>Based on all these considerations, we draw the general lesson from
>Japan's experience that when inflation and interest rates have
>fallen close to zero, and the risk of deflation is high, stimulus,
>both monetary and fiscal, should go beyond the levels conventionally
>implied by baseline forecasts of future inflation and economic
>activity.
>
>Full paper (228 KB PDF)
>
>Keywords
>Monetary policy, Taylor rule, fisal policy
That the Fed staff was interested in investigating this - and Greenspan has long been said to be interested in the topic - suggests that they're thinking about the risks of U.S. deflation. There's little doubt that's why they eased so aggressively last year.
Doug