Policy regime change against chronic deflation? Policy option under a long-term liquidity trap

Ippei Fujiwara, Yoshiyuki Nakazono, Kozo Ueda

    Research output: Contribution to journalArticle

    5 Citations (Scopus)

    Abstract

    The policy package known as Abenomics appears to have influenced the Japanese economy drastically, in particular, in the financial markets. In this paper, focusing on the aggressive monetary easing of Abenomics, the first arrow, we evaluate its role in guiding public perceptions on monetary policy stance through the management of expectations. In order to end chronic deflation, such as that which Japan has been suffering over the last two decades, policy regime change must be perceived by economic agents. Analysis using the QUICK survey system (QSS) monthly survey data shows that monetary policy reaction to inflation rates has been in a declining trend since the mid 2000s, implying intensified forward guidance well before Abenomics. However, Japan seems to have moved closer to a long-term liquidity trap, where even long-term bond yields are constrained by the zero lower bound. Consequently, no sizable difference in perceptions has been found before and after the introduction of Abenomics. Estimated changes in perceptions are not abrupt enough to satisfy "Sargent's (1982) criteria for regime change" termed by Eggertsson (2008). This poses a serious challenge to central banks: what is an effective policy option left under the long-term liquidity trap?

    Original languageEnglish
    Pages (from-to)59-81
    Number of pages23
    JournalJournal of the Japanese and International Economies
    Volume37
    DOIs
    Publication statusPublished - 2015 Sep 1

    Fingerprint

    deflation
    liquidity
    monetary policy
    Japan
    central bank
    financial market
    inflation
    regime
    economy
    trend
    management
    economics
    Policy options
    Liquidity trap
    Deflation
    Regime change
    Monetary policy
    Guidance
    Inflation rate
    Bond yields

    Keywords

    • Liquidity trap
    • Monetary policy rule
    • Survey forecasts

    ASJC Scopus subject areas

    • Economics and Econometrics
    • Finance
    • Political Science and International Relations

    Cite this

    Policy regime change against chronic deflation? Policy option under a long-term liquidity trap. / Fujiwara, Ippei; Nakazono, Yoshiyuki; Ueda, Kozo.

    In: Journal of the Japanese and International Economies, Vol. 37, 01.09.2015, p. 59-81.

    Research output: Contribution to journalArticle

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