Advanced Search
MyIDEAS: Login to save this book chapter or follow this series

Two Decades of Japanese Monetary Policy and the Deflation Problem

In: Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15

Contents:

Author Info

  • Takatoshi Ito
  • Frederic S. Mishkin

Abstract

This paper reviews Japanese monetary policy over the last two decades with an emphasis on the experience of deflation from the mid-1990s. The paper is quite critical of the conduct of monetary policy, particularly from 1998 to 2003. The Bank of Japan's rhetoric was not helpful in fighting deflation, and the interest rate hike in August 2000 amid deflation was a serious mistake. Deflation can be quite costly, and a key element in both preventing and escaping deflation is the management of expectations, using either price level or inflation targeting, because the zero lower bound on interest rates means that the overnight interest rate can no longer be used as the instrument of monetary policy. This paper proposes how to best manage expectations to exit deflation. Price-level targeting overcomes theoretical problems, such as need for a history dependent strategy, associated with inflation targeting. However, because actions speak louder than words, management of expectations also involves non-conventional monetary policies, a combination of which might have to be tried to help the Japanese economy escape its deflationary trap.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/chapters/c0092.pdf
Download Restriction: no

Bibliographic Info

as in new window

This chapter was published in:

  • Takatoshi Ito & Andrew K. Rose, 2006. "Monetary Policy with Very Low Inflation in the Pacific Rim, NBER-EASE, Volume 15," NBER Books, National Bureau of Economic Research, Inc, number ito_06-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 0092.

    Handle: RePEc:nbr:nberch:0092

    Contact details of provider:
    Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Email:
    Web page: http://www.nber.org
    More information through EDIRC

    Related research

    Keywords:

    Other versions of this item:

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Takatoshi Ito & Kimie Harada, 2005. "Japan premium and stock prices: two mirrors of Japanese banking crises," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 10(3), pages 195-211.
    2. Adam S. Posen, 1998. "Restoring Japan's Economic Growth," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 35, July.
    3. Frederic S. Mishkin & Eugene N. White, 2002. "U.S. Stock Market Crashes and Their Aftermath: Implications for Monetary Policy," NBER Working Papers 8992, National Bureau of Economic Research, Inc.
    4. Takatoshi Ito & Tokuo Iwaisako, 1995. "Explaining Asset Bubbles in Japan," NBER Working Papers 5358, National Bureau of Economic Research, Inc.
    5. Berg, C. & Jonung, L., 1998. "Pioneering Price Level Targeting: The Swedish Experience 1931-1937," Papers, Stockholm - International Economic Studies 642, Stockholm - International Economic Studies.
    6. Coenen, Günter & Orphanides, Athanasios & Wieland, Volker, 2003. "Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero," Working Paper Series, European Central Bank 0231, European Central Bank.
    7. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
    8. Kenneth N. Kuttner & Adam S. Posen, 2003. "The Difficulty of Discerning What's Too Tight: Taylor Rules and Japanese Monetary Policy," Working Paper Series, Peterson Institute for International Economics WP03-10, Peterson Institute for International Economics.
    9. Taylor, John-B, 2001. "Low Inflation, Deflation, and Policies for Future Price Stability," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 35-51, February.
    10. Romer, Christina D., 1992. "What Ended the Great Depression?," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 52(04), pages 757-784, December.
    11. Fujiki, Hiroshi & Okina, Kunio & Shiratsuka, Shigenori, 2001. "Monetary Policy under Zero Interest Rate: Viewpoints of Central Bank Economists," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(1), pages 89-130, February.
    12. Matthew D. Shapiro & David W. Wilcox, 1996. "Mismeasurement in the Consumer Price Index: An Evaluation," NBER Working Papers 5590, National Bureau of Economic Research, Inc.
    13. Stephen G. Cecchetti & Anil K Kashyap, 1995. "International Cycles," NBER Working Papers 5310, National Bureau of Economic Research, Inc.
    14. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Aug, pages 9-110.
    15. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
    16. Robert Dittmar & William T. Gavin, 2000. "What do New-Keynesian Phillips Curves imply for price-level targeting?," Review, Federal Reserve Bank of St. Louis, issue Mar, pages 21-30.
    17. Frederic S. Mishkin, 1999. "International Experiences with Different Monetary Policy Regimes," NBER Working Papers 6965, National Bureau of Economic Research, Inc.
    18. Okina, Kunio & Shirakawa, Masaaki & Shiratsuka, Shigenori, 2001. "The Asset Price Bubble and Monetary Policy: Japan's Experience in the Late 1980s and the Lessons: Background Paper," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 395-450, February.
    19. Norman Loayza & Raimundo Soto, 2002. "Inflation Targeting: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 1, pages 001-022 Central Bank of Chile.
    20. Takatoshi Ito, 2004. "Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting?," RBA Annual Conference Volume, Reserve Bank of Australia, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
    21. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, Elsevier, vol. 42(6), pages 1033-1067, June.
    22. Takeo Hoshi & Anil K Kashyap, 2004. "Solutions to the Japanese Banking Crisis: What might work and what definitely will fail," Hi-Stat Discussion Paper Series, Institute of Economic Research, Hitotsubashi University d04-35, Institute of Economic Research, Hitotsubashi University.
    23. Thomas F. Cargill & Michael M. Hutchison & Takatoshi Ito, 2001. "Financial Policy and Central Banking in Japan," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032856, December.
    24. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
    25. Orphanides, Athanasios & Wieland, Volker, 2000. "Efficient Monetary Policy Design near Price Stability," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 327-365, December.
    26. David Reifschneider & John C. Williams, 2000. "Three lessons for monetary policy in a low-inflation era," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, pages 936-978.
    27. Jeffrey C. Fuhrer, 1995. "The [un]importance of forward-looking behavior in price specifications," Working Papers, Federal Reserve Bank of Boston 95-6, Federal Reserve Bank of Boston.
    28. Okina, Kunio & Shiratsuka, Shigenori, 2002. "Asset Price Bubbles, Price Stability, and Monetary Policy: Japan' s Experience," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 20(3), pages 35-76, October.
    29. Andrew Atkeson & Patrick J. Kehoe, 2004. "Deflation and depression: is there an empirical link?," Staff Report, Federal Reserve Bank of Minneapolis 331, Federal Reserve Bank of Minneapolis.
    30. Marvin Goodfriend, 2001. "Financial stability, deflation, and monetary policy," Working Paper, Federal Reserve Bank of Richmond 01-01, Federal Reserve Bank of Richmond.
    31. Bennett McCallum, 2002. "Inflation Targeting and the Liquidity Trap," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 9, pages 395-438 Central Bank of Chile.
    32. McCallum, Bennett T, 2000. "Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 32(4), pages 870-904, November.
    33. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," NBER Working Papers 5893, National Bureau of Economic Research, Inc.
    34. Lars E.O. Svensson, 2003. "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 17(4), pages 145-166, Fall.
    35. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen.
    36. Erica Groshen & Mark Schweitzer, 1999. "Identifying Inflation’s Grease and Sand Effects in the Labor Market," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 273-314 National Bureau of Economic Research, Inc.
    37. Bennett T. McCallum, 2000. "Alternative Monetary Policy Rules: A Comparison with Historical Settings for the United States, the United Kingdom, and Japan," NBER Working Papers 7725, National Bureau of Economic Research, Inc.
    38. Gauti B. Eggertsson & Michael Woodford, 2003. "Optimal Monetary Policy in a Liquidity Trap," NBER Working Papers 9968, National Bureau of Economic Research, Inc.
    39. Frederic S. Mishkin, 1996. "The Channels of Monetary Transmission: Lessons for Monetary Policy," NBER Working Papers 5464, National Bureau of Economic Research, Inc.
    40. Frederic S. Mishkin, 1991. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Chapters, in: Financial Markets and Financial Crises, pages 69-108 National Bureau of Economic Research, Inc.
    41. Okina, Kunio & Shiratsuka, Shigenori, 2004. "Policy commitment and expectation formation: Japan's experience under zero interest rates," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 15(1), pages 75-100, March.
    42. David E. Lebow & David J. Stockton & William L. Wascher, 1995. "Inflation, nominal wage rigidity, and the efficiency of labor markets," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 95-45, Board of Governors of the Federal Reserve System (U.S.).
    43. Kuroda, Sachiko & Yamamoto, Isamu, 2003. "The Impact of Downward Nominal Wage Rigidity on the Unemployment Rate: Quantitative Evidence from Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(4), pages 57-85, December.
    44. Alan Ahearne & Joseph Gagnon & Jane Haltmaier & Steve Kamin ... [et al.]., 2002. "Preventing deflation: lessons from Japan's experience in the 1990s," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 729, Board of Governors of the Federal Reserve System (U.S.).
    45. David Card & Dean Hyslop, 1996. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Working Papers 5538, National Bureau of Economic Research, Inc.
    46. John C. Williams, 2003. "Simple rules for monetary policy," Economic Review, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, pages 1-12.
    47. Aaron Drew & Adrian Orr, 1999. "The Reserve Bank's role in the recent business cycle: actions and evolutions," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, Reserve Bank of New Zealand, vol. 62, March.
    48. Robert Dittmar & William T. Gavin & Finn Kydland, 1999. "The inflation-output variability tradeoff and price-level targets," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 23-32.
    49. Frederic S. Mishkin, 2001. "The Transmission Mechanism and the Role of Asset Prices in Monetary Policy," NBER Working Papers 8617, National Bureau of Economic Research, Inc.
    50. Brent R. Moulton, 1996. "Bias in the Consumer Price Index: What Is the Evidence?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 10(4), pages 159-177, Fall.
    51. George A. Akerlof & William R. Dickens & George L. Perry, 1996. "The Macroeconomics of Low Inflation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 1-76.
    52. Takatoshi Ito, 1991. "The Japanese Economy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262090295, December.
    53. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 839-868, September.
    54. Summers, Lawrence, 1991. "How Should Long-Term Monetary Policy Be Determined? Panel Discussion," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 23(3), pages 625-31, August.
    55. repec:sae:niesru:v:174:y::i:1:p:68-79 is not listed on IDEAS
    56. Shigenori Shiratsuka, 1999. "Measurement errors and quality-adjustment methodology: lessons from the Japanese CPI," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q II, pages 2-13.
    57. Kuroda, Sachiko & Yamamoto, Isamu, 2003. "Are Japanese Nominal Wages Downwardly Rigid? (Part I): Examinations of Nominal Wage Change Distributions," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 1-29, August.
    58. Reifschneider, David & Willams, John C, 2000. "Three Lessons for Monetary Policy in a Low-Inflation Era," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 32(4), pages 936-66, November.
    59. Kuroda, Sachiko & Yamamoto, Isamu, 2003. "Are Japanese Nominal Wages Downwardly Rigid? (Part II): Examinations Using a Friction Model," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 31-68, August.
    60. Bennett T. McCallum, 2003. "Japanese monetary policy, 1991-2001," Economic Quarterly, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Win, pages 1-31.
    61. Oda, Nobuyuki & Okina, Kunio, 2001. "Further Monetary Easing Policies under the Non-negativity Constraints of Nominal Interest Rates: Summary of the Discussion Based on Japan's Experience," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(S1), pages 323-360, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberch:0092. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.