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Monetary Policy and Structural Decline: Lessons from Japan for the European Crisis

Author

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  • Gunther Schnabl

    () (Leipzig University Institute for Economic Policy)

Abstract

Japan experienced a boom-and-bust cycle in the real estate and stock markets almost 20 years earlier than Europe. Since the bursting of the Japanese bubble economy, the country has fallen into a deep recession and has experimented with crisis therapies in the form of unconventional monetary expansion, Keynesian fiscal stimulus, and recapitalization of financial institutions. Japan reached a low interest rate environment in the mid 1990s and has accumulated an exceptionally high level of public debt during more than two decades of economic stagnation. This paper compares the boom-and-bust cycles in Japan and Europe with respect to the reasons for excessive booms, the characteristics of the crises, and the (potential) effects of the crisis therapies. It is argued that in both Japan and Europe the consequences of expansionary monetary and fiscal policies include the hysteresis of a low-interest rate and high government debt environment, the erosion of the allocation and signaling functions of the interest rate, the gradual quasi-nationalization of financial institutions, as well as gradual real income losses. The economic policy implication for Europe and Japan is the timely exit from crisis therapies in the form of excessively expansionary monetary and fiscal policies. © 2015 The Earth Institute at Columbia University and the Massachusetts Institute of Technology

Suggested Citation

  • Gunther Schnabl, 2015. "Monetary Policy and Structural Decline: Lessons from Japan for the European Crisis," Asian Economic Papers, MIT Press, vol. 14(1), pages 124-150, Winter/Sp.
  • Handle: RePEc:tpr:asiaec:v:14:y:2015:i:1:p:124-150
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    File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/ASEP_a_00327
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    References listed on IDEAS

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    1. Holger Zemanek, 2010. "Competitiveness Within The Euro Area: The Problem That Still Needs To Be Solved," Economic Affairs, Wiley Blackwell, vol. 30(3), pages 42-47, October.
    2. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
    3. Ronald McKinnon & Gunther Schnabl, 2004. "The Return to Soft Dollar Pegging in East Asia: Mitigating Conflicted Virtue," International Finance, Wiley Blackwell, vol. 7(2), pages 169-201, July.
    4. José Abad & Axel Löffler & Gunther Schnabl & Holger Zemanek, 2013. "Fiscal divergence, current account divergence and TARGET2 imbalances in the EMU," Intereconomics: Review of European Economic Policy, Springer;German National Library of Economics;Centre for European Policy Studies (CEPS), vol. 48(1), pages 51-58, January.
    5. Kazuo Ueda, 2012. "Deleveraging and Monetary Policy: Japan since the 1990s and the United States since 2007," Journal of Economic Perspectives, American Economic Association, vol. 26(3), pages 177-202, Summer.
    6. Gunther Schnabl & Andreas Hoffmann, 2008. "Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View," The World Economy, Wiley Blackwell, vol. 31(9), pages 1226-1252, September.
    7. Sekine, Toshitaka & Kobayashi, Keiichiro & Saita, Yumi, 2003. "Forbearance Lending: The Case of Japanese Firms," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 21(2), pages 69-92, August.
    8. Rishi Goyal & Ronald McKinnon, 2003. "Japan's Negative Risk Premium in Interest Rates: The Liquidity Trap and the Fall in Bank Lending," The World Economy, Wiley Blackwell, vol. 26(3), pages 339-363, March.
    9. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-1977, December.
    10. Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
    11. Ronald I. McKinnon & Kenichi Ohno, 1997. "Dollar and Yen: Resolving Economic Conflict between the United States and Japan," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133350, January.
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    Citations

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    Cited by:

    1. Gunther Schnabl, 2017. "The Failure of ECB Monetary Policy from a Mises-Hayek Perspective," CESifo Working Paper Series 6388, CESifo Group Munich.
    2. repec:bla:chinae:v:25:y:2017:i:1:p:32-57 is not listed on IDEAS
    3. repec:kap:iecepo:v:15:y:2018:i:2:d:10.1007_s10368-017-0402-6 is not listed on IDEAS
    4. Juliane Gerstenberger & Gunther Schnabl, 2017. "The Impact of Japanese Monetary Policy Crisis Management on the Japanese Banking Sector," CESifo Working Paper Series 6440, CESifo Group Munich.
    5. Gunther Schnabl, 2017. "Exchange Rate Regime, Financial Market Bubbles and Long-term Growth in China: Lessons from Japan," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 25(1), pages 32-57, January.
    6. Pablo Duarte & Gunther Schnabl, 2019. "Monetary policy, inequality and political instability," The World Economy, Wiley Blackwell, vol. 42(2), pages 614-634, February.
    7. Raphael Fischer & Gunther Schnabl, 2018. "Regional heterogeneity, the rise of public debt and monetary policy in post-bubble Japan: lessons for the EMU," International Economics and Economic Policy, Springer, vol. 15(2), pages 405-428, April.
    8. repec:spr:wirtsc:v:98:y:2018:i:7:d:10.1007_s10273-018-2322-7 is not listed on IDEAS

    More about this item

    Keywords

    Japan; recession; crisis; crisis therapies; monetary expansion; Keynesian fiscal stimulus; recapitalization of financial institutions; public debt; economic stagnation; boom-and-bust; Europe; fiscal policies; interest rate;

    JEL classification:

    • F00 - International Economics - - General - - - General
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E66 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General Outlook and Conditions
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • N00 - Economic History - - General - - - General

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