Since at least the time of David Hume (1752) in the mid-18th century, it has been recognized that episodes of deflation or disinflation may have costly implications for the real economy, and much attention has been devoted to assessing how policy should be conducted to reduce such costs. The interest of prominent classical economists in these questions, including Hume, Thornton, and Ricardo, was spurred by practical policy debates about how to return to the gold standard following episodes of pronounced wartime inflation. Drawing on limited empirical evidence, these authors tried to identify factors that contributed to the real cost of deflation, including those factors controlled by policy. They advocated that a deflation should be implemented gradually, if at all; in a similar vein a century later, Keynes (1923) and Irving Fisher (1920) discussed the dangers of trying to quickly reverse the large runup in prices that occurred during World War I and its aftermath.

While the modern literature has provided substantial empirical evidence to support the case that deflations or disinflations are often quite costly, there is less agreement about the underlying factors that may have contributed to high real costs in some episodes, or that might explain pronounced differences in costs across episodes. Indeed, disagreement about the factors principally responsible for influencing the costs of disinflation helped fuel contentious debates about the appropriate way to reduce inflation during the 1970s and early 1980s. Many policymakers and academics recommended a policy of gradualism–reflecting the view that the costs of disinflation were largely due to structural persistence in wage and price setting–while others recommended aggressive monetary tightening on the grounds that the credibility of monetary policy in the 1970s had sunk too low for gradualism to be a viable approach.