George Selgin's monograph Less than Zero: The Case for a Falling Price Level in a Growing Economy, is one of the most well known defences of the productivity norm and its implied price deflation in the face of increased productivity. Under a productivity norm, monetary policy would allow permanent improvements in productivity to lower prices permanently. Thus the idea that there are good and bad types of deflation. The basic point is that bad deflation is driven by demand shrinking while good deflation is caused by supply expanding. The good kind of deflation is the result of increases in productivity.
In this blog posting Scott Sumner raises a number of interesting issues about Selgin's argument. Sumner's preliminary response to the Selgin argument,
1. The productivity norm as a monetary policy regime? It’s OK with me if it is OK with you (meaning my fellow Americans.)Note that Selgin responds to a couple of Sumner's points in the comments. Well worth a read.
2. Mild deflation at the rate of productivity increase? Yes, but only if several stringent preconditions are met. And we haven’t yet met them.