IDEAS home Printed from https://ideas.repec.org/p/tky/fseres/2000cf90.html
   My bibliography  Save this paper

On the role of monetary policy in a deflationary economy: The case of Japan

Author

Listed:
  • Motoshige Itoh

    (Faculty of Economics, University of Tokyo)

  • Naoki Shimoi

    (CIRJE, Faculty of Economics, University of Tokyo)

Abstract

In this paper we review the role of monetary policy for a country facing deflationary pressure based on the recent experience of the Japanese economy. We discuss economic background of inflation policy in Japan and analyze the impacts of the policy. Japanese economy is in a liquidity trap now. Two types of reasons were pointed out to be in liquidity traps. They are a real factor and a monetary factor. The former factor is the case analyzed by Krugman, where IS curve shifts due to structural reason such as aging of population. Under this condition a negative real interest rate is requested to escape from the liquidity trap. However, liquidity trap can also arise from monetary reason and the scenario of escape from the trap is different. We illustrate the case where deflationary expectation leads the economy to a liquidity trap. If it is necessary to utilize monetary policy for generating inflation expectation, we then need some explicit monetary policy rules, which is strong enough to escape from liquidity traps but at the same time which is effective to suppress unnecessary political pressure and to keep the independence of the central bank. Inflation targeting is a candidate for such a rule.

Suggested Citation

  • 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.
  • Handle: RePEc:tky:fseres:2000cf90
    as

    Download full text from publisher

    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2000/2000cf90.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Buiter, Willem H. & Panigirtzoglou, Nikolaos, 1999. "Liquidity Traps: How to Avoid Them and How to Escape Them," CEPR Discussion Papers 2203, C.E.P.R. Discussion Papers.
    2. Fischer, Stanley, 1982. "Seigniorage and the Case for a National Money," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 295-313, April.
    3. Okina, Kunio, 1999. "Monetary Policy under Zero Inflation: A Response to Criticisms and Questions Regarding Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 17(3), pages 157-182, December.
    4. Paul R. Krugman, 1998. "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 137-206.
    5. 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.
    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


    Cited by:

    1. Itoh, Motoshige & Shimoi, Naoki, 2000. "On the Role of Monetary Policy in a Deflationary Economy: The Case of Japan," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 238-260, December.
    2. Buiter, Willem, 2003. "Deflation: Prevention and Cure," CEPR Discussion Papers 3869, C.E.P.R. Discussion Papers.
    3. 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, vol. 19(S1), pages 323-360, February.
    4. Tibor Tatay & Zsanett Orlovits & Zsuzsanna Novák, 2022. "Inhomogeneous Financial Markets in a Low Interest Rate Environment—A Cluster Analysis of Eurozone Economies," Risks, MDPI, vol. 10(10), pages 1-22, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Itoh, Motoshige & Shimoi, Naoki, 2000. "On the Role of Monetary Policy in a Deflationary Economy: The Case of Japan," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 238-260, December.
    2. 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.
    3. Coenen, Gunter & Wieland, Volker, 2003. "The zero-interest-rate bound and the role of the exchange rate for monetary policy in Japan," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1071-1101, July.
    4. Günter Coenen & Volker W. Wieland, 2004. "Exchange-Rate Policy and the Zero Bound on Nominal Interest Rates," American Economic Review, American Economic Association, vol. 94(2), pages 80-84, May.
    5. Batini, Nicoletta & Yates, Anthony, 2003. "Hybrid Inflation and Price-Level Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 283-300, June.
    6. Wolman, Alexander L, 2005. "Real Implications of the Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 273-296, April.
    7. Klaeffling, Matt & López Pérez, Víctor, 2003. "Inflation targets and the liquidity trap," Working Paper Series 272, European Central Bank.
    8. Marvin Goodfriend, 2000. "Overcoming the zero bound on interest rate policy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, pages 1007-1057.
    9. 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.
    10. 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.
    11. Jess Benhabib & Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Avoiding Liquidity Traps," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 535-563, June.
    12. Singleton,John, 2010. "Central Banking in the Twentieth Century," Cambridge Books, Cambridge University Press, number 9780521899093, October.
    13. David Amirault & Brian O'Reilly, 2001. "The Zero Bound on Nominal Interest Rates: How Important Is It?," Staff Working Papers 01-6, Bank of Canada.
    14. Mervyn A. King, 1999. "Challenges for monetary policy : new and old," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 11-57.
    15. R. Anton Braun & Yuichiro Waki, 2006. "Monetary Policy During Japan'S Lost Decade," The Japanese Economic Review, Japanese Economic Association, vol. 57(2), pages 324-344, June.
    16. McCallum, Bennett T, 2000. "Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 870-904, November.
    17. Adam, Klaus & Billi, Roberto M., 2006. "Optimal Monetary Policy under Commitment with a Zero Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1877-1905, October.
    18. Semyon Malamud & Andreas Schrimpf, 2016. "Intermediation Markups and Monetary Policy Passthrough," Swiss Finance Institute Research Paper Series 16-75, Swiss Finance Institute.
    19. Shu Wu & Shigeru Iwata, 2004. "Estimating Monetary Policy Effects When Interest Rates are Bounded at Zero," Econometric Society 2004 Far Eastern Meetings 478, Econometric Society.
    20. Pierre L. Siklos, 2020. "Looking into the Rear-View Mirror: Lessons from Japan for the Eurozone and the U.S?," IMES Discussion Paper Series 20-E-02, Institute for Monetary and Economic Studies, Bank of Japan.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:tky:fseres:2000cf90. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CIRJE administrative office (email available below). General contact details of provider: https://edirc.repec.org/data/ritokjp.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.