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The Japanese Deflation: Has It Had Real Effects? Could It Have Been Avoided?

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  • Claudio Morana

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Abstract

Has deflation contributed to the long lasting stagnation of the Japanese economy? Could the Bank of Japan have stopped deflation by implementing a more expansionary monetary policy? Our tentative answers are probably not to the first question, and probably yes to the second question. We find that the total cost of deflation over the period 1995-2003 has been close to a 1.1% rate of lost GDP. Yet, on the basis of statistical significance and robustness to specification choices, this evidence is not compelling. On the other hand, the estimated positive linkage between nominal base money growth and inflation is significant and robust, even given current economic conditions. However, in order to be inflationary, monetary policy should have been more expansionary than what actually observed, even since the launch of the quantitative easing in 2001.

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Bibliographic Info

Paper provided by ICER - International Centre for Economic Research in its series ICER Working Papers with number 29-2004.

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Length: 35 pages
Date of creation: Nov 2004
Date of revision:
Handle: RePEc:icr:wpicer:29-2004

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Keywords: deflation; monetary policy; Friedman's rule; Japan; generalised flexible least squares; time-varying parameter VAR; thick modelling;

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Cited by:
  1. Anna Creti & Khaled Guesmi & Ilyes Abid, 2014. "Conditional Correlations and Volatility Spillovers between Oil Price and OECD Stock index: a Multivariate Analysis," Working Papers 2014-065, Department of Research, Ipag Business School.
  2. Andrea Beltratti & Claudio Morana, 2006. "Comovements in International Stock Markets," ICER Working Papers 3-2006, ICER - International Centre for Economic Research.
  3. Shimasawa, Manabu & Sadahiro, Akira, 2009. "Policy reform and optimal inflation rate for Japan in computable OLG economy," Economic Modelling, Elsevier, vol. 26(2), pages 379-384, March.
  4. Fabio C. Bagliano & Claudio Morana, 2011. "Macro-finance interactions in the US: A global perspective," Working papers 23, Former Department of Economics and Public Finance "G. Prato", University of Torino.
  5. Khaled Guesmi & Ilyes Abid & Olfa Kaabia, 2014. "Conditional Correlations and Volatility Spillovers between Crude Oil and Oil- exporting and importing countries," Working Papers 2014-334, Department of Research, Ipag Business School.

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