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Deciphering the Message in Japanese Deflation Dynamics


  • Paul D. McNelis

    (Department of Economics Georgetown University Washington, DC 20057 USA,)

  • Naoyuki Yoshino

    (Department of Economics Keio University 2-15-45 Mita Minata-Ku Tokyo 10883-45 Japan,)


This paper uses linear and nonlinear neural network regime-switching (NNRS) models to decipher the message in Japanese deflation dynamics and thus identify the channels through which Japan's economy can escape its deflationary spiral. The NNRS model is superior to a linear model with respect to in-sample specification tests and out-of-sample forecasting accuracy. The most important variables affecting inflation are interest rates and the output gap. Given the zero lower bound on interest rates, it will be most effective to end Japan's deflationary cycle with policies that reverse the output gap by stimulating investment. Copyright (c) 2005 The Earth Institute at Columbia University and Massachusetts Institute of Technology.

Suggested Citation

  • Paul D. McNelis & Naoyuki Yoshino, 2004. "Deciphering the Message in Japanese Deflation Dynamics," Asian Economic Papers, MIT Press, vol. 3(2), pages 49-70.
  • Handle: RePEc:tpr:asiaec:v:3:y:2004:i:2:p:49-70

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    Cited by:

    1. Arne Bigsten, 2005. "Can Japan Make a Comeback?," The World Economy, Wiley Blackwell, vol. 28(4), pages 595-606, April.

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