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Monetary Policy under Zero Inflation: A Response to Criticisms and Questions Regarding Monetary Policy

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  • Okina, Kunio

    (Institute for Monetary & Econ Studies, Bank of Japan)

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    Abstract

    The Japanese economy has recently been faced with massive nonperforming assets and a large output gap. Thanks to the historically unprecedented accommodative monetary policy of the Bank of Japan (BOJ), prices have generally been stable and severe deflation has been avoided. Despite this, the BOJ has been questioned and criticized regarding its conduct of monetary policy. For example, why doesn't it adopt inflation targeting? Why has the BOJ stubbornly refused to increase the outright purchase of long-term government bonds? Why does the BOJ implement fund absorption operations in the middle of monetary easing? This paper tries to evaluate questions and criticisms regarding the conduct of the BOJ's monetary policy under zero inflation by using the following two criteria: (1) the BOJ will take measures necessary to achieve the sound development of the national economy through the pursuit of price stability in the long run; however, (2) the BOJ will not take such measures if the side effects are deemed greater than the effects, which makes it difficult to achieve the objective in (1).

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    Bibliographic Info

    Article provided by Institute for Monetary and Economic Studies, Bank of Japan in its journal Monetary and Economic Studies.

    Volume (Year): 17 (1999)
    Issue (Month): 3 (December)
    Pages: 157-182

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    Handle: RePEc:ime:imemes:v:17:y:1999:i:3:p:157-182

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    Cited by:
    1. Kuttner, Kenneth-N, 2004. "Comments on "Price Stability and Japanese Monetary Policy."," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(3), pages 37-46, October.
    2. Gern, Klaus-Jürgen & Sander, Birgit & Scheide, Joachim & Schlie, Markus & Strauß, Hubert, 1999. "Expansion der Weltwirtschaft bleibt moderat," Open Access Publications from Kiel Institute for the World Economy 2346, Kiel Institute for the World Economy (IfW).
    3. Cargill, Thomas F. & Parker, Elliott, 2004. "Price deflation, money demand, and monetary policy discontinuity: a comparative view of Japan, China, and the United States," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 125-147, March.
    4. Bartosz Mackowiak, 2005. "What does the Bank of Japan do to East Asia?," SFB 649 Discussion Papers SFB649DP2005-059, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    5. Clouse James & Henderson Dale & Orphanides Athanasios & Small David H. & Tinsley P.A., 2003. "Monetary Policy When the Nominal Short-Term Interest Rate is Zero," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-65, September.
    6. Baltensperger, Ernst & Fischer, Andreas M & Jordan, Thomas J., 2006. "Strong Goal Independence and Inflation Targets," CEPR Discussion Papers 5915, C.E.P.R. Discussion Papers.
    7. Motoshige Itoh & Naoki Shimoi, 2000. "On the role of monetary policy in a deflationary economy: The case of Japan," CIRJE F-Series CIRJE-F-90, CIRJE, Faculty of Economics, University of Tokyo.
    8. Athanasios Orphanides & Volker Wieland, 1999. "Efficient monetary policy design near price stability," Finance and Economics Discussion Series 1999-67, Board of Governors of the Federal Reserve System (U.S.).
    9. Gern, Klaus-Jürgen & Gottschalk, Jan & Kamps, Christophe & Sander, Birgit & Scheide, Joachim & Schlie, Markus & Strauß, Hubert, 1999. "Spürbare Belebung der Weltwirtschaft," Open Access Publications from Kiel Institute for the World Economy 2317, Kiel Institute for the World Economy (IfW).
    10. Athanasios Orphanides, 2004. "Monetary policy in deflation: the liquidity trap in history and practice," Finance and Economics Discussion Series 2004-01, Board of Governors of the Federal Reserve System (U.S.).
    11. Morana, Claudio, 2004. "The Japanese stagnation: an assessment of the productivity slowdown hypothesis," Japan and the World Economy, Elsevier, vol. 16(2), pages 193-211, April.
    12. Ronald McKinnon & Gunther Schnabl, 2002. "Synchronized Business Cycles in East Asia: Fluctuations in the Yen/Dollar Exchange Rate and China’s Stabilizing Role," Working Papers 02010, Stanford University, Department of Economics.

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