Here. (pdf) Quotable:
Both Keynes and Hayek began their analysis of the 1930’s with the observation of a simple fact. Deep slumps are possible, and the evidence presented in this paper further confirms that fact. The awkward thing is that much of modern macro theory seems to deny this possibility. New Keynesian and New Classical models deny it by the assumption that the economy quickly reequilibrates in response to shocks. In contrast, the models used by central banks (and many international financial institutions) effectively deny it on the basis of a different assumption; namely, that appropriate policy can always stop out the downturn and return us to good economic performance ..
Another awkward fact revealed by historical studies is that many deep slumps have not been preceded by high inflation. There was no significant inflation in the United States in the 1920s, nor in Japan in the 1990s, nor in Southeast Asia on the eve of their crisis, nor indeed prior to the current crisis. Price stability might then still be a necessary condition for macroeconomic stability, though that too is questionable in growing economies (fn1), but history clearly teaches us that it is not a sufficient condition. Monetary frameworks based on the objective of price stability must find some way to take this fact into account.
fn1 Given positive productivity growth per capita, perhaps aggregate prices should be allowed to fall. There was a voluminous preWar literature on this topic. See Selgin (1997). Over the last decade or so, globalisation and the integration into the world economy of previously socialist economies has raised global productivity enormously, implying that this issue is not just of academic interest. See also White (2005)