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Monetary and Fiscal Policy in a Liquidity Trap:The Japanese Experience 1999-2004

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Title: Monetary and Fiscal Policy in a Liquidity Trap:The Japanese Experience 1999-2004
Authors: Kudo, Takeshi
Issue Date: 2006
Publisher: University of Chicago Press
Citation: T.Ito and A.K.Rose (eds.) Monetary Policy with Very Low Inflation in the Pacific Rim (NBER-East Asia seminar on economics v.15), pp.233-273, NBER and Chicago University Press, Chicago. 2006
Abstract: We characterize monetary and fiscal policy rules to implement optimal responses to a substantial decline in the natural rate of interest, and compare them with policy decisions made by the Japanese central bank and government in 1999.2004. First, we find that the Bank of Japan's policy commitment to continuing monetary easing until some prespecified conditions are satisfied lacks history dependence, a key feature of the optimal monetary policy rule. Second, the term structure of the interest rate gap (the spread between the actual real interest rate and its natural rate counterpart) was not downward sloping, indicating that the Bank of Japan's commitment failed to have sufficient influence on the market's expectations about the future course of monetary policy. Third, we find that the primary surplus in 1999.2002 was higher than predicted by the historical regularity, implying that the Japanese government deviated from the Ricardian rule toward fiscal tightening. These findings suggest that inappropriate conduct of monetary and fiscal policy during this period delayed the timing to escape from the liquidity trap.
Keywords: Deflation / zero lower bound for interest rates / liquidity trap / history dependent inflation targeting / interest rate gap / Ricardian fiscal policy
URI: http://hdl.handle.net/10069/7388
ISBN: 0226378977
Relational Links: http://hdl.handle.net/10069/7386
Rights: (c) 2006 by the National Bureau of Economic Research. All rights reserved.
Type: Book
Text Version: publisher
Appears in Collections:Book Chapter

Citable URI : http://hdl.handle.net/10069/7388

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