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The Zero Interest Rate Floor (ZIF) and its Implications for Monetary Policy in Japan

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Author Info

  • Douglas Laxton
  • Ben Hunt

Abstract

This paper uses the IMF's macroeconomic model MULTIMOD to examine the implications of the zero-interest-rate floor (ZIF) for the design of monetary policy in Japan. Similar to findings in other studies, targeting rates of inflation lower than 2.0 percent significantly increases the likelihood of the ZIF becoming binding. Systematic monetary policy strategies that respond strongly to stabilize output and inflation, or that incorporate some explicit price-level component, can help to mitigate the implications of the ZIF.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/186.

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Length: 37
Date of creation: 01 Nov 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/186

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References

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  1. Benjamin Hunt, 2000. "Inflation Targeting Under Potential Output Uncertainty," Computing in Economics and Finance 2000 180, Society for Computational Economics.
  2. Coenen, Günter & Orphanides, Athanasios & Wieland, Volker, 2003. "Price stability and monetary policy effectiveness when nominal interest rates are bounded at zero," CFS Working Paper Series 2003/13, Center for Financial Studies (CFS).
  3. 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.
  4. 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.
  5. 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.
  6. Svensson, Lars E O, 2000. "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," CEPR Discussion Papers 2566, C.E.P.R. Discussion Papers.
  7. Jeffrey Fuhrer & Brian Madigan, 1994. "Monetary policy when interest rates are bounded at zero," Working Papers 94-1, Federal Reserve Bank of Boston.
  8. Ramana Ramaswamy & Christel Rendu, 2000. "Japan's Stagnant Nineties: A Vector Autoregression Retrospective," IMF Staff Papers, Palgrave Macmillan, vol. 47(2), pages 5.
  9. Harald Uhlig, 2000. "Should we be afraid of Friedman's rule?," Macroeconomics 0004016, EconWPA.
  10. David Reifschneider & John C. Williams, 1999. "Three lessons for monetary policy in a low inflation era," Finance and Economics Discussion Series 1999-44, Board of Governors of the Federal Reserve System (U.S.).
  11. Drew, Aaron & Hunt, Benjamin, 2000. "Efficient simple policy rules and the implications of potential output uncertainty," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 143-160.
  12. Randall Morck & Masao Nakamura, 2000. "Japanese Corporate Governance and Macroeconomic Problems," Harvard Institute of Economic Research Working Papers 1893, Harvard - Institute of Economic Research.
  13. Victor Gaiduch & Ben Hunt, 2000. "Inflation Targeting Under Potential Output Uncertainty," IMF Working Papers 00/158, International Monetary Fund.
  14. Albert Ando, 2000. "On the Japanese Economy and Japanese National Accounts," NBER Working Papers 8033, National Bureau of Economic Research, Inc.
  15. Willem H Buiter & Nikolaos Panigirtzoglou, 2000. "Liquidity traps: how to avoid them and how to escape them," Bank of England working papers 111, Bank of England.
  16. Douglas Laxton & Eswar Prasad, 1997. "Possible Effects of European Monetary Union on Switzerland: A Case Study of Policy Dilemmas Caused by Low Inflation and the Nominal Interest Rate Floor," IMF Working Papers 97/23, International Monetary Fund.
  17. David E. Lebow, 1993. "Monetary policy at near-zero interest rates," Working Paper Series / Economic Activity Section 136, Board of Governors of the Federal Reserve System (U.S.).
  18. Victor Gaiduch & Benjamin Hunt, 2000. "Inflation targeting under potential output uncertainty," Reserve Bank of New Zealand Discussion Paper Series DP2000/08, Reserve Bank of New Zealand.
  19. Hamid Faruqee & Douglas Laxton & Bart Turtelboom & Peter Isard & Eswar Prasad, 1998. "Multimod Mark III: The Core Dynamic and Steady State Model," IMF Occasional Papers 164, International Monetary Fund.
  20. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  21. A. Senhadji Semlali & Mohsin S. Khan, 2000. "Threshold Effects in the Relationship Between inflation and Growth," IMF Working Papers 00/110, International Monetary Fund.
  22. Peter Isard & Douglas Laxton & Ann-Charlotte Eliasson, 2001. "Inflation Targeting with NAIRU Uncertainty and Endogenous Policy Credibility," IMF Working Papers 01/7, International Monetary Fund.
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Citations

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Cited by:
  1. Daniel Leigh, 2004. "Monetary Policy and the Dangers of Deflation:Lessons from Japan," Economics Working Paper Archive 511, The Johns Hopkins University,Department of Economics.
  2. Coenen, Günter & Wieland, Volker, 2003. "The zero-interest-rate bound and the role of the exchange rate for monetary policy in Japan," Working Paper Series 0218, European Central Bank.
  3. Laxton, Douglas & N'Diaye, Papa & Pesenti, Paolo, 2006. "Deflationary shocks and monetary rules: An open-economy scenario analysis," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 665-698, December.
  4. Dag Kolsrud, 2008. "Stochastic Ceteris Paribus Simulations," Computational Economics, Society for Computational Economics, vol. 31(1), pages 21-43, February.
  5. Coenen, Günter & Wieland, Volker, 2004. "Exchange-rate policy and the zero bound on nominal interest rates," Working Paper Series 0350, European Central Bank.
  6. Vladimir Klyuev & Heesun Kiem & Ondra Kamenik & Douglas Laxton, 2008. "Why is Canada's Price Level So Predictable?," IMF Working Papers 08/25, International Monetary Fund.
  7. Ortiz, Marco, 2014. "Fat-Tailed Shocks and the Central Bank Reaction," Working Papers 2014-002, Banco Central de Reserva del Perú.
  8. Shin-Ichi Nishiyama, 2009. "Monetary Policy Lag, Zero Lower Bound, and Inflation Targeting," Working Papers 09-2, Bank of Canada.

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