Was monetary policy optimal during past deflation scares?
Countries around the world have fallen into one of the deepest recessions since the Great Depression—a recession exacerbated by a severe financial crisis. Among the challenges that face monetary policymakers in such uncertain times is the danger that economies worldwide, including the United States, Japan, and the Euro Area, may enter a period of deflation, in which the prices of goods and services fall relentlessly. ; Policymakers and economists agree that sustained deflation would likely worsen the already fragile economic and financial environment. Past episodes of deflation in the wake of financial crises have included falling asset values, collapsing business and consumer confidence, credit crunches, widespread bankruptcies, long-lasting surges in unemployment, and other adverse conditions. Moreover, a deflationary environment has the potential to complicate the conduct of monetary policy. ; Policymakers have responded vigorously to the current crisis to prevent deflation. Some analysts warn that the U.S. policy response might be too proactive and cause a subsequent surge in inflation. At the same time, other analysts advise that the policy response in many other countries might not be active enough to fend off deflation. Of course, it is too early to judge the success of the different policies in the current episode. Still, it is possible to learn from past attempts by policymakers to fend off deflation under similar economic circumstances. ; Billi shows how Taylor rules can be used to evaluate monetary policy. He then compares actual policy during past deflation scares—in Japan in the 1990s and in the United States in the 2000s—with how policy would have been conducted using Taylor rules based, to the extent possible, on data available at the time. The rule-based evidence suggests that Japan’s monetary policy response during its deflation scare might have been too weak, while the U.S. response might have been too strong.
Volume (Year): (2009)
Issue (Month): Q III ()
|Contact details of provider:|| Postal: One Memorial Drive, Kansas City, MO 64198|
Phone: (816) 881-2254
Web page: http://www.kansascityfed.org
More information through EDIRC
|Order Information:|| Email: |
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.:
- David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
- Athanasios Orphanides & Simon van Norden, 2002.
"The Unreliability of Output-Gap Estimates in Real Time,"
The Review of Economics and Statistics,
MIT Press, vol. 84(4), pages 569-583, November.
- Athanasios Orphanides & Simon van Norden, 1999. "The reliability of output gap estimates in real time," Finance and Economics Discussion Series 1999-38, Board of Governors of the Federal Reserve System (U.S.).
- Athanasios Orphanides & Simon Van_Norden, 2000. "The Reliability of Output Gap Estimates in Real Time," Econometric Society World Congress 2000 Contributed Papers 0768, Econometric Society.
- Athanasios Orphanides & Simon van Norden, 1999. "The Reliability of Output Gap Estimates in Real Time," Macroeconomics 9907006, EconWPA.
- Athanasios Orphanides & Simon van Norden, 2001. "The Unreliability of Output Gap Estimates in Real Time," CIRANO Working Papers 2001s-57, CIRANO.
- Kamada, Koichiro, 2005. "Real-time estimation of the output gap in Japan and its usefulness for inflation forecasting and policymaking," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 309-332, December.
- Kamada, Koichiro, 2004. "Real-Time Estimation of the Output Gap in Japan and its Usefulness for Inflation Forecasting and Policymaking," Discussion Paper Series 1: Economic Studies 2004,14, Deutsche Bundesbank, Research Centre.
- 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, vol. 20(3), pages 35-76, October.
- Kuttner, Kenneth N. & Posen, Adam S., 2004. "The difficulty of discerning what's too tight: Taylor rules and Japanese monetary policy," The North American Journal of Economics and Finance, Elsevier, vol. 15(1), pages 53-74, March.
- Kenneth N. Kuttner & Adam S. Posen, 2003. "The Difficulty of Discerning What's Too Tight: Taylor Rules and Japanese Monetary Policy," Working Paper Series WP03-10, Peterson Institute for International Economics.
- Ippei Fujiwara, Naoko Hara, Naohisa Hirakata, Takeshi Kimura, and Shinichiro Watanabe, 2007. "Japanese Monetary Policy during the Collapse of the Bubble Economy: A View of Policymaking under Uncertainty," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(2), pages 89-128, November.
- Ippei Fujiwara & Naoko Hara & Naohisa Hirakata & Takeshi Kimura & Shinichiro Watanabe, 2007. "Japanese Monetary Policy during the Collapse of the Bubble Economy: A View of Policy-making under Uncertainty," IMES Discussion Paper Series 07-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
- Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
- Clarida, Richard & Gali, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," Working Papers 97-32, C.V. Starr Center for Applied Economics, New York University.
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
- Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
- Michael Bordo & Andrew Filardo, 2005. "Deflation and monetary policy in a historical perspective: remembering the past or being condemned to repeat it?," Economic Policy, CEPR;CES;MSH, vol. 20(44), pages 799-844, October.
- Michael D. Bordo & Andrew Filardo, 2004. "Deflation and Monetary Policy in a Historical Perspective: Remembering the Past or Being Condemned to Repeat It?," NBER Working Papers 10833, National Bureau of Economic Research, Inc.
- Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
- Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
- Mise, Emi & Kim, Tae-Hwan & Newbold, Paul, 2005. "On suboptimality of the Hodrick-Prescott filter at time series endpoints," Journal of Macroeconomics, Elsevier, vol. 27(1), pages 53-67, March.
- Richard H. Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. Full references (including those not matched with items on IDEAS)