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Increased Diversity and Deepened Uncertainty: Policy Challenges in a Zero-Inflation Economy

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  • Kiyohiko G. Nishimura
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    The world economy today shows 'great diversity'. There are multiple engines of growth in various regions around the globe. Risks are diversified, as many novel financial products are being introduced and sold to a continuing flow of newcomers to the financial world. This increased diversity seems to deepen uncertainty surrounding monetary policy in two respects. First, coupled with increased competition, it may make prices less responsive to short-run demand changes than before, thus making monetary transmission mechanism less certain. In fact, Japanese IS and Phillips curves seem increasingly uncertain in the past 15 years. Second, we are in transition between one financial structure of little diversification and another of great diversification. In a transition period, information is scarce and rapidly becomes obsolete, posing real challenges to financial stability. I argue that the flexible gradualism, which the Bank has now adopted, is a prudent way to cope with such deepened uncertainty. Copyright 2007 Blackwell Publishing Ltd

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    Article provided by Wiley Blackwell in its journal International Finance.

    Volume (Year): 10 (2007)
    Issue (Month): 3 (December)
    Pages: 281-300

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    Handle: RePEc:bla:intfin:v:10:y:2007:i:3:p:281-300
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